05 October 2016

Financial Times: IMF backs ECB in dispute with banks

European banks should carry out “deep rooted reforms” to reduce risks to financial stability rather than focus on problems caused by negative and low interest rates, the International Monetary Fund said.

The IMF’s argument largely aligns the fund with the European Central Bank in its acrimonious dispute with some of the eurozone’s biggest banks over whether the ECB or lenders themselves are blame for sector woes, including low profits and weak asset prices.

In its setpiece Global Financial Stability Report, the IMF said that while the ECB’s monetary policy — notably negative interest rates — posed threats to the sector’s health, the main cause of the region’s banks’ problems lay elsewhere.

Peter Dattels, deputy director of the monetary and capital department of the fund, said: “There are simply too many branches with too few deposits and too many banks with funding costs way above their peers.”

He highlighted problems facing Deutsche Bank, which has been under heavy pressure from investors, arguing that it needed “to continue to adjust to convince investors that its business model is viable going forward.”

The report added that European lenders also needed to make more progress in ridding their balance sheets of non-performing loans. By contrast, many bankers have emphasised the impact of the ECB’s ultra-loose monetary policy. [...]

European lenders have absorbed almost all of the cost of negative rates, generally opting not to pass it on to any except their largest customers.

But the fund’s report claimed that banks in Europe would remain vulnerable even if rates rise and economic conditions improve.

It acknowledged that “a protracted period of low and negative policy rates and flat yield [curves, which reduce the difference between long and short-term borrowing rates, so hitting banks’ financial model] could undermine financial resilience in the medium term”. But it added that a 50 basis point rise in interest rates and stronger growth would still not be enough to return European banks to full financial health.

A cyclical recovery would raise profitability by 40 per cent but 30 per cent of Europe’s banking assets, worth $8.5tn, would remain unable to generate profits.

The fund’s call for banks to lower costs by shutting branches and merging also echoes Mario Draghi, ECB president, who argues that the region is overbanked.

Andrea Enria, the chairman of the European Banking Authority, the EU’s regulator of regulators, also criticised banks on Wednesday for being too quick to blame their wores on low interest rates.

“Many [of the banks] are still delaying the adjustment [to their business models”, he said.

The IMF report said that closing a third of branches would save banks $18bn, or just over 4 per cent of lenders’ costs. If eurozone banks had the same proportion of branches as their counterparts in Nordic countries, cost savings would rise to $38bn, or more than 8 per cent of costs. [...]

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