IMF still sees advantage for 'too important to fail' banks

Mon Mar 31, 2014 9:05am EDT
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WASHINGTON (Reuters) - Top banks in the euro zone benefited from an implicit taxpayer subsidy of $90 billion to $300 billion last year due to ongoing state support which makes them "too important to fail," the International Monetary Fund said in a report on Monday.

Subsidies in the United Kingdom and Japan may have been as high as $110 billion in 2013, while they ranged from $20 billion to $70 billion in the United States, the IMF said in a chapter of its twice-yearly "Global Financial Stability Report."

The IMF, a Washington-based global financial institution, analyzes the economic and financial policies of its 188 member countries and warns about potential problems. Its report could influence regulators in the United States and Europe that are implementing tough new rules for the financial industry to minimize the likelihood and cost of bailing out big banks.

Bank assets have grown dramatically in many countries since 2000, while the number of banks has fallen. In most countries, the assets of the three largest banks make up at least 40 percent of total banking assets, while in Canada, France and Spain that figure is at least 60 percent, the IMF said.

That means problems or failure in one of a country's top banks could throw its entire financial system into chaos.

This problem only got worse in the wake of the global financial crisis in 2007-08, when many governments intervened in the banking sector or encouraged mergers to prevent banks from collapsing, according to the report.

"Countries emerged from the financial crisis with an even bigger problem: many banks were even larger than before and so were the implicit government guarantees," the IMF said.

The Fund said that funding advantage has gone down somewhat since 2009, especially in the United States, due to tighter regulations and effective supervision.

But the subsidies may be even higher for banks in the euro zone. And 'systemically important banks' still enjoy implicit subsidies of around 60 basis points on average compared to their less weighty peers.   Continued...

The International Monetary Fund (IMF) logo is seen at the IMF headquarters building during the 2013 Spring Meeting of the International Monetary Fund and World Bank in Washington, April 18, 2013. REUTERS/Yuri Gripas