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The IMF is worried about overheating in some Latin American economies, thanks to an “excessively stimulative environment”.
Although the institution is reluctant to label current conditions in the region’s largest markets bubbly, when it comes to credit growth the IMF acknowledges that concerns are rising about whether loan growth is becoming “excessive and eventually unsustainable.” Equity prices are also showing signs of “stretched valuations” in places like Chile, Colombia and Peru.
Despite being one of the region’s most active users of “macroprudential” measures to cool its economy, Peru stands out from the pack due to its rapid recent credit growth and, especially, sky-high equity valuations.
As ever, the IMF’s latest Global Financial Stability Report is worth a look, not least because the organisation’s chart makers seem to be getting a lot more creative. Some of the infographics in the report’s latest edition verge on the psychedelic.
More importantly, however, the IMF issues a stern rebuke to financial regulators for “incomplete policy actions and inadequate reforms”. The global banking system remains vulnerable to shocks, as some lenders remain “caught in a maelstrom of interlinked pressures”, the IMF warns.
Euro area banks are singled out as particularly vulnerable. Thinly capitalised and more reliant on wholesale funding than many of their counterparts elsewhere, some of the currency union’s banks—particularly those in the bloc’s troubled periphery—are now shut out from most funding markets. This is reflected in the interest rates that the most desperate banks are offering on deposits, seeking to reduce their reliance on official support by luring funds from wary savers.
The rate hikes by Greek, Portuguese and Irish banks in recent months have been significant, dampening these institutions’ profitability and prolonging an already protracted recovery process. Another interesting conclusion to draw from the chart—adapted from the one that appears in the IMF’s report—is that banks in Italy seem relatively more desperate for deposits than banks in Spain.
A working paper from the IMF investigates recent trends in bank lending in the Middle East and North Africa (MENA). The title says it all: “Recent Credit Stagnation in the MENA Region: What to Expect? What Can Be Done?”
Although focused on MENA, the paper presents a useful history of the frequency, scope and magnitude of recent credit booms (and subsequent busts) in a number of regions. For MENA itself, the authors make a few policy suggestions to limit the impact of future credit crises. Ultimately, they conclude, developing local debt markets as an alternative to bank lending will go a long way to bolstering financial systems in the region: “While pronounced bank credit cycles may be difficult to avoid in their entirety, their impact on economic activity might be lessened with a more diversified financial system”.
New research offers a robust defence of stricter capital requirements in the face of banking industry lobbying.
The reports, from the Financial Stability Board, the Basel Committee on Banking Supervision and the International Monetary Fund, assess the long-term economic impact of tougher capital and liquidity requirements for banks. If phased in over a four-year period, each percentage point increase in banks’ core capital ratio trims 0.04% from the annual growth rate of GDP over the phase-in period, leaving GDP 0.2% lower at the end of four-and-a-half-years than it otherwise would have been. A 25% hike in liquid asset holdings affects growth even less. “The benefits substantially exceed the potential output costs,” the groups conclude.
A similar exercise this summer by the Institute of International Finance, a banking industry association, came to a much gloomier conclusion. Under “reasonable assumptions,” it concluded that GDP in the US, Europe and Japan would be 3% lower at the end of a five-year transition period, with nearly 10m fewer jobs created as a result. A subsequent softening of the original proposals for global capital and liquidity reforms may temper the lobby’s distress, but it’s safe to say that regulators will continue to laud the benefit of stricter rules while banks will keep fretting about the costs.
If, as the saying goes, you are judged by the company you keep, Greece is running with the wrong crowd.
Despite European Union officials dismissing talk of a debt restructuring and reportedly boosting the size of a joint aid package with the IMF, traders of credit default swaps on Greek sovereign debt have taken a dim view of the country’s ability to service its debts.
A year ago, Greek CDS spreads traded in a similar range to Israel and Malaysia. Today, the spreads on Greek CDS place the country in very different company. Sandwiched between Ukraine and Argentina, Greece is now among neighbours who are no strangers to default.
The headline conclusion from the IMF’s latest Global Financial Stability Report is good news for banks. The organisation trimmed US$500bn from its estimate for global bank writedowns between 2007 and 2010. Lenders are now expected to write down asset values by US$2.3trn over this period, less than the US$2.8trn projected in the IMF’s analysis six months ago.
Although conditions are improving, many risks remain. One particularly worrying risk, the IMF highlights, is exposure to commercial real estate. In the US, for example, the peak in writedowns for corporate and consumer loans has already been reached, according to estimates from the IMF and Federal Reserve. Loan losses on residential real estate loans, meanwhile, should peak in the third quarter of this year. Writedowns on commercial real estate loans, however, are expected to keep rising until the second half of 2011.
In an advance chapter of the IMF’s upcoming Global Financial Stability Report, the group investigates the “merits and feasibility of systemic-risk-based capital surcharges”. Otherwise known as bank taxes, these levies enjoy broad support around the world, although Sweden is the only country currently collecting such fees from its domestic banks.
The IMF reviews the literature and develops a framework for assessing a charge on banks based on the threat that they pose to the global financial system. This would discourage banks from becoming “too big to fail” and raise funds to finance future bailouts (or pay down the deficits that resulted from past bailouts).
The IMF is careful not to endorse the imposition of such fees. As if to underline the unreality of its simulations, it makes the following assumptions:
(1) the capital surcharges are estimated across countries;
(2) regulators have access to the relevant cross-border data; and
(3) these surcharges can be enforced seamlessly across countries.
On these points, the gulf between theory and practice is as wide as the spread on subprime mortgage-backed collateralised debt obligations underwritten by Greek banks.