IMF warns more work is needed to tackle big bank risk

WASHINGTON Thu Jan 23, 2014 1:27pm EST

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

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.

Credit: Reuters/Yuri Gripas

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WASHINGTON (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.

(Reporting by Douwe Miedema; Editing by Toni Reinhold)

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Comments (2)
seafloor wrote:
The financial markets have to admit, that the financial system doesn’t exist anymore as it does before the crisis. The European banks still refuse to lend their money to the economy and they still don’t trust each other. Instead they reflate the stock markets. Their only systemically related business is to buy government bonds with high rates of interest with the almost free money from the ECB and even this simple minded business is not good enough to finish the never ending story of the European debt crisis. The question is how systemically relevant are banks, that refuse the financial system?

Jan 23, 2014 6:45pm EST  --  Report as abuse
All excellent points and factual seafloor. I too wondered about the impact of QE on G bonds, farcical situation arguably.

Jan 28, 2014 9:12am EST  --  Report as abuse
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