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IMF: Global Banking System Under Severe Threat

Christine Lagarde (photo: IMF)

Many have reported on the IMF’s new growth forecasts, which show serious downgrades throughout the industrialized world. But less remarked upon is the information about the financial industry in the same report, which warns that the global banking system is in its most precarious position since the 2008 crisis.

The International Monetary Fund has warned that the global financial system is more vulnerable now than at any time since the 2008 financial crisis.

Some European banks are particularly weak and “urgently need to bolster their capital levels”, the IMF said in its Global Financial Stability Report.

It said time is “running out to tackle vulnerabilities” that threaten the banking system and economic recovery.

New IMF head Christine Lagarde has said that European banks were in urgent need of recapitalization. But look at the numbers we’re talking about. The IMF estimates in their report that the Eurozone debt crisis has cost EU banks a whopping 200 billion euros, or $273 billion, in just over the last two years. This is why the IMF is saying that banks cannot recapitalize on their own, and must use the European Financial Stability Facility – intended for indebted countries – for their own banks. The EFSF as TARP, then. But the potential losses beyond the $273 billion lost already total another $400 billion. There doesn’t seem to be any end to this exposure. Most of the capital held by banks would be wiped out by these losses. And European nations attempting a bailout of this size in the midst of their own debt crisis sounds impossible.

The real meat of this is in this PDF beginning on page 16. Here’s a representative quote: “Nearly half of the €6.5 trillion stock of government debt issued by euro area governments is showing signs of heightened credit risk.” And this isn’t just Europe: the contagion could move to other parts of the world, particularly other banks. And as banks tighten up, the effects on economies are obvious. I’ll just add one more quote: “Restoring confidence in the stability of the US housing market is the key to bolstering the prospects for US banks.” Good luck with that.

The Moody’s downgrades of US banks yesterday were based on the notion that there is no appetite for another bailout of the financial sector. We may have a test of that proposition soon.

CommunityThe Bullpen

IMF: Global Banking System Under Severe Threat

Many have reported on the IMF’s new growth forecasts, which show serious downgrades throughout the industrialized world. But less remarked upon is the information about the financial industry in the same report, which warns that the global banking system is in its most precarious position since the 2008 crisis.

The International Monetary Fund has warned that the global financial system is more vulnerable now than at any time since the 2008 financial crisis.

Some European banks are particularly weak and “urgently need to bolster their capital levels”, the IMF said in its Global Financial Stability Report.

It said time is “running out to tackle vulnerabilities” that threaten the banking system and economic recovery.

New IMF head Christine Lagarde has said that European banks were in urgent need of recapitalization. But look at the numbers we’re talking about. The IMF estimates in their report that the Eurozone debt crisis has cost EU banks a whopping 200 billion euros, or $273 billion, in just over the last two years. This is why the IMF is saying that banks cannot recapitalize on their own, and must use the European Financial Stability Facility – intended for indebted countries – for their own banks. The EFSF as TARP, then. But the potential losses beyond the $273 billion lost already total another $400 billion. There doesn’t seem to be any end to this exposure. Most of the capital held by banks would be wiped out by these losses. And European nations attempting a bailout of this size in the midst of their own debt crisis sounds impossible.

The real meat of this is in this PDF beginning on page 16. Here’s a representative quote: “Nearly half of the €6.5 trillion stock of government debt issued by euro area governments is showing signs of heightened credit risk.” And this isn’t just Europe: the contagion could move to other parts of the world, particularly other banks. And as banks tighten up, the effects on economies are obvious. I’ll just add one more quote: “Restoring confidence in the stability of the US housing market is the key to bolstering the prospects for US banks.” Good luck with that.

The Moody’s downgrades of US banks yesterday were based on the notion that there is no appetite for another bailout of the financial sector. We may have a test of that proposition soon.

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David Dayen

David Dayen