A much-needed pruning of banks across the world could stifle lending and dampen economic recovery, the International Monetary Fund said yesterday.
To boost profits, banks need to raise prices in certain business lines, pull out of others altogether, and put their money where it yielded more, the Fund said.
“The transition to new business models could ... potentially (create) a headwind against the recovery,” the IMF said in its biannual Global Financial Stability Report.
After the devastating 2007-2009 financial crisis, regulators across the world have forced banks to raise more shareholder equity as a buffer against losses, and to pull out of the riskiest investments and loans.
But the industry had been slow in finding new ways to make money, and the return on equity of banks representing 80 per cent of the assets of the largest institutions now was lower than what was required by shareholders, the IMF estimated.
An overhaul would not be easy, however, the IMF said, and it pleaded for ailing banks to be shut down.
Banks should stop selling products at low prices, or even at a loss
“This would help relieve competitive pressures in a context of excess capacity and allow viable banks to build and maintain capital buffers and meet credit demand,” it said.
In a model run, the IMF found that 20 per cent of more than 300 banks – measured by assets – would need to raise lending margins by more than 50 basis points on their entire loan book, a level it said was not realistic.
The largest transitions were needed in some euro area countries, in the United Kingdom and in Japan. Many banks in the euro area had been slow to adjust, and an upcoming test of their financial health by the European Central Bank created a “golden opportunity” to clean up balance sheets.
Banks should also stop selling products at low prices, or even at a loss, to lure clients and try to sell them other products, the IMF said. Regulators should encourage them to adopt more transparent pricing models.
The report also showed how banks had started pulling back, though only two – the UK’s Royal Bank of Scotland and Switzerland’s UBS – had completely exited a business. The fixed-income business, in which banks trade non-equity products for clients, showed the largest exodus, with banks such as Goldman Sachs Group Inc, JPMorgan Chase & Co and Barclays PLC all selectively shrinking, the IMF said.
That business is under pressure as a result of some of the biggest regulatory changes introduced after the crisis.
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