IMF: Banks need overhaul, lack strength to support global recovery

Some large banks are not profitable enough to increase lending, hindering the flow of credit needed to lift economic growth particularly in Europe, the International Monetary Fund said.

While large financial institutions have become healthier after being required to clean their balance sheets and hold more capital, they also carry the burden of nonperforming loans and litigation costs while facing acute competition, the IMF said. They’ve also moved away from the risky activities that generated higher returns, it said.

Some global banks are “struggling to adapt to new business realities, with low profitability raising concerns about their ability to build capital buffers and meet credit demand,” the IMF said in its Global Financial Stability Report. “These banks will require a fundamental overhaul of their business models, including a combination of repricing existing business lines, reallocating capital across activities, or retrenching altogether.”

Benefits of record-low interest rates are being felt unevenly across advanced economies, helping boost corporate investment in the U.S. while it remains weak in parts of the euro area, the IMF said. More policies are needed to ensure monetary stimulus buttresses household spending and corporate hiring at a time when it’s also encouraging riskier investment, according to the fund, which yesterday cut its 2015 global growth forecast.

Rising Risks

“Accommodative monetary policies face a trade-off between the upside economic benefits and the downside financial stability risks,” the report states. “Although the economic benefits are becoming more evident in some economies, market and liquidity risks have increased to levels that could compromise financial stability if left unaddressed.”

An IMF simulation based on 300 banks in advanced countries shows that many euro-area banks are in a more difficult position to boost lending than their counterparts. Sixty percent of them, measured by assets, cannot deliver credit growth of more than 5 percent, compared with about 35 percent for the sample as a whole, the report shows.

Even among the banks that have the capacity to supply more credit, a group of institutions — many of them in the euro area — have high repricing needs, the IMF said. “Because these repricing needs may be unrealistic for individual institutions to implement, these banks may not be willing to expand lending.”