Banks need overhaul, but risk to recovery, IMF says

Tue Oct 7, 2014 8:06pm EDT
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By Douwe Miedema

WASHINGTON (Reuters) - A much-needed pruning of banks across the world could stifle lending and dampen economic recovery, the International Monetary Fund said on Wednesday.

To boost profits, banks need to raise prices in certain business lines, pull out of others altogether, and put their money where it yielded more, the Fund said.

"The transition to new business models could ... potentially (create) a headwind against the recovery," the IMF said in its biannual Global Financial Stability Report.

After the devastating 2007-09 financial crisis, regulators across the world have forced banks to raise more shareholder equity as a buffer against losses, and to pull out of the riskiest investments and loans.

But the industry had been slow in finding new ways to make money, and the return on equity of banks representing 80 percent of the assets of the largest institutions now was lower than what was required by shareholders, the IMF estimated.

An overhaul would not be easy, however, the IMF said, and it pleaded for ailing banks to be shut down.

"This would help relieve competitive pressures in a context of excess capacity and allow viable banks to build and maintain capital buffers and meet credit demand," it said.

In a model run, the IMF found that 20 percent of more than 300 banks - measured by assets - would need to raise lending margins by more than 50 basis points on their entire loan book, a level it said was not realistic.   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