IMF warns more work is needed to tackle big bank risk

WASHINGTON Thu Jan 23, 2014 1:25pm EST

WASHINGTON Jan 23 (Reuters) - Big banks still pose a threat to the world financial system because there is a general assumption that governments will come to their rescue in case of trouble, an International Monetary Fund executive said on Thursday.

"It is astonishing that officials in countries are still largely ill-equipped to deal with a Lehman Brothers-style bankruptcy, where assets and liabilities are scattered across multiple jurisdictions and entities," Jose Vinals, tasked with financial oversight at the IMF, said in a blog post.

The 2008 bankruptcy of investment bank Lehman Brothers marked the height of the global credit crisis, and many of the reforms that have since been implemented were aimed at preventing a repeat of such a collapse.

During the financial crisis, a number of the world's big banks were bailed out by governments with billions of dollars in taxpayer money.

"The not-so-good news is that, despite these efforts, implicit subsidies to these systemically important financial institutions remain too large," Vinals said, who said a related IMF study was due in April.

The problem of so-called too-big-to-fail banks is a priority for regulators in the Group of 20, which is due to convene in November and expected to discuss a global financial reform agenda, Vinals said.

The G20 includes Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the UK, the United States and the European Union.

The Basel III bank capital rules require banks to borrow less to fund their business, so they are better able to deal with problems. Governments have also told banks to draw up plans that would enable them to systematically unwind their businesses if the necessity arose.

The United States and Europe are putting into place so-called resolution authorities that would protect the wider financial system without the use of taxpayer funds in the event a bank needed to be bailed out.

Vinals said the G20 had "yet to do much of the heavy lifting" to sort out what would happen if a bank with major operations abroad were to go under.

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Comments (1)
PeterCatranis wrote:
“Stimulus” and “bailouts” are ongoing

Fed funds are 0.07% at historic lows, savings rates are at near all time record lows yet the prime rate remains unchanged at 3.25% and 30 year fixed mortgage are at 4.39%?

Average rates from 1974 through 2014 (1974 off the gold standard)

Fed Funds = 5.68%
Prime = 8.12%
30 year fixed mortgage =8.62%
3 Month Treasury = 5.13%
2 Year Treasury = 5.91%
National debt to GDP 1974 = 31.69
Average Federal Debt held by non US investors = 1.219 trillion

Fed Funds 0.07%
Prime 3.25%
30 year fixed mortgage 4.39%
3 Month Treasury 0.04%
2 Year Treasury 0.38%
National debt to GDP 2013 = 100.46%
Current US Debt held by non US investors = 5.653 trillion

Banks borrow at 0.07% lend out at 3.25%, while savers are being stripped of over 500B a year in interest income. How does removing 500B a year from the free market economy to save the US Treasury the same in debt service cost stimulate an economy?

If this isn’t a massive bailout what would you call it?

I guess we all had it wrong it’s economic stimulus and bailouts for the Banks and the US Treasury with the savers/taxpayers once again picking up the tab.

Peter Catranis

Jan 23, 2014 3:01pm EST  --  Report as abuse
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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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