WASHINGTON Global economic conditions remain subdued despite a rally in financial markets and policymakers need to act to address underlying risks, including dealing with damaged banks, a top IMF official said on Tuesday.
David Lipton, the International Monetary Fund's first deputy managing director, said further improvements in the economic outlook will require repairing bank balance sheets and in some cases banks may need to be closed.
"Banks will need to remove the dead wood and address asset quality problems, with some having to increase provisioning for bad loans and add fresh capital," Lipton said in prepared remarks to the Chartered Financial Analyst Society.
"Some banks will prove to be non-viable and will need to be wound down in an orderly manner," he added.
Lipton said one of the lessons from the global financial crisis was that banks needed to improve the way they manage risks so they do not wreck the economy. This means that banks and other financial institutions will need to reassess their involvement in complex and opaque activities, he added.
Propping up and bailing out damaged banks has cost governments hundreds of billions of dollars and pushed some countries' debts to dangerous levels that has left them vulnerable to debt market shocks.
The IMF has warned that unfinished financial reforms are holding back a recovery in key parts of the global economy. The financial crisis prompted a new order of financial regulation in every part of the global financial system from over-the-counter derivatives to bank capital requirements.
Lipton said G20-led regulatory reforms helped to boost market confidence in recent months but he urged policymakers to maintain the reform momentum.
"The process of agreeing and implementing the global regulatory reform agenda has been viewed as gradual," he said, adding that banking systems in some countries remained weak and reforms needed to be adjusted so they regain their strength.
(Reporting by Lesley Wroughton; Editing by Eric Walsh and Cynthia Osterman)