Banks must raise billions to fend off crisis, says IMF
The world's biggest banks face an impending funding crisis, with a "wall of maturities" fast approaching, and must raise billions more in capital in the coming years, the International Monetary Fund (IMF) has warned.
By Edmund Conway in Davos Published: 6:45AM GMT 27 Jan 2010
The warnings formed part of the IMF's update to its Global Financial Stability Report and World Economic Outlook, which its managing director, Dominique Strauss-Kahn is planning to roadshow at the World Economic Forum in Davos this week. Photo: Reuters
In comments which will reignite fears of a relapse into a second financial crisis, the IMF said that banks have yet to bolster their balance sheets sufficiently and could be vulnerable to a whole range of shocks in the coming months.
It also indicated that with governments including the UK and the US borrowing so much in the next few years, there was an increasing chance of a sovereign debt crisis, something which could trigger chaos for public and private sectors alike.
The warnings formed part of the IMF's update to its Global Financial Stability Report and World Economic Outlook, which its managing director, Dominique Strauss-Kahn is planning to roadshow at the World Economic Forum in Davos this week.
The Fund said that, despite the remaining risks to the economic and financial system, policy-makers had "forestalled another Great Depression", and raised its growth forecasts for almost every economy in the world both this year and the next.
It lifted its world growth forecast this year by 0.75pc to 3.9pc, and in an unexpected boost to the Chancellor, Alistair Darling, it lifted its UK forecast by 0.4pc points this year to 1.3pc, putting it in line with the Treasury's own projection.
However, the good news was overshadowed by its fresh warnings about the vulnerability of the banking system. It said that although it was likely to revise its estimate of losses derived from the global financial crisis from its October $3.4 trillion (£2.1 trillion) estimate, banks had still failed to reinforce their balance sheets sufficiently.
It said: "Even though some bank capital has been raised, substantial additional capital may be needed to support the recovery of credit and sustain economic growth under expected new Basel capital adequacy standards".
Banking analysts recently estimated that Barclays would need to raise an extra £17bn in capital to comply with the new rules, with other banks facing similarly large bills. With some insiders suggesting that even the new stricter Basel rules on capital do not go far enough, the potential cost could be higher still.
The IMF also warned that banks face "a wall of maturities looming ahead through 2011–13" in their shorter-term funding. It added: "A future retrenchment in confidence therefore could severely weaken banks' ability to roll over this debt."
However, it is not merely the banks themselves that have caused the IMF concern. It name-checked the UK as one country facing particular scrutiny over the state and sustainability of its public finances, saying the extra debt raised by the Government could, at the very least, "crowd out private sector credit growth, gradually raising interest rates for private borrowers and putting a drag on the economic recovery."