By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-The International Monetary Fund (IMF) has advocated economic risk taking and said that banks do not have the financial muscle to support global recovery, according to the latest Global Financial Stability Report (GFSR).
José Viñals, financial counselor at the IMF in his GFSR press conference opening remarks said banks are safer but may not be strong enough to vigorously support the recovery.
Viñals said risks are shifting to the shadow banking system in the form of rising market and liquidity risks. ‘’If left unaddressed, these risks could compromise global financial stability,’’ he noted.
According to the financial counselor at the IMF, in order to address this new global imbalance, economic risk-taking must be promotedby improving the transmission of monetary policy to the real economy.
Also, he said there must be the need to address financial excessesthrough better micro- and macroprudential policies.
However, the report says things are different in the United States and Japan, but less so in Europe and in emerging markets.
The global lender’s financial counselor affirmed that business fixed investment has been picking up in the US, although at a slower pace than in previous recoveries. ‘’Capacity utilisation is returning to precrisis levels and banks are loosening lending standards, as companies are increasingly focusing on investment rather than equity buybacks,’’ he said.
Viñals added that though banksare much safer now,having increased their capital levels and liquidity, but to address the challenges militating against global recovery, the GFSR finds that many banks do not have the financial muscle to provide enough credit to vigorously support the recovery.
‘’It means that after stabilising and repairing their balance sheets, banks now face a new challenge: They need to adapt their business models to the post-crisis market realities and new regulatory environment,’’ the report said.
The GFSRanalysed 300 large banks in advanced economies—which comprise the bulk of their banking system—and found that banks representing almost 40 percent of total assets are not strong enough to supply adequate credit in support of the recovery, the report added.
It said in the euro area, this proportion rises to about 70 percent. ‘’These banks will need a more fundamental overhaul of their business models, including a combination of repricing existing business lines, reallocating capital across activities, consolidation, or retrenchment,’’ it said.
The GFSR affirmed in Europe, the comprehensive assessment of balance sheets by the European Central Bank (ECB) provides a strong starting point for the much-needed changes in bank business models.
‘’In other words, when banks are receiving a clean bill of health in terms of capital adequacy, it means that they are safe enough to lead a “normal life”. But in many countries, we need banks to be “athletes” who can vigorously support the recovery,’’ Viñals said in his remark.
The IMF financial counselor says while banks grapple with these challenges, capital markets are now providing more significant sources of financing, which is a welcome development. ‘’Yet this is shifting the locus of risks to shadow banks,’’ he said.
He cited example with credit-focused mutual funds which he said has have seen massive asset inflows, and have collectively become a very large owner of U.S. corporate and foreign bonds.
‘’The problem is that these fund inflows have created an illusion of liquidityin fixed income markets. The liquidity promised to investors in good times is likely to exceed the available liquidity provided by markets in times of stress, especially as banks have less capacity to make markets,’’ Viñals affirmed.
