29 January 2009

IMF calls for more aggressive policy actions including possible "bad bank"

More aggressive actions are needed to ensure that the necessary deleveraging process is less disorderly, the IMF states. The restructuring process might also involve the use of a publicly-owned "bad bank".

More aggressive actions are needed to ensure that the necessary deleveraging process is less disorderly, the IMF states in its January Global Financial Stability Report update. The restructuring process might involve the use of a publicly-owned "bad bank" to remove distressed assets from the balance sheets of institutions.

 

In general, an approach including liquidity provision, capital injections, and disposal of problem assets should be implemented to encourage balance sheet cleansing. At the same time, international co-operation will be required to ensure the policy coherence and consistency needed to re-establish financial stability.

 

The IMF raises estimate of U.S.-origin asset writedowns to $2.2 trillion. Much of the recent deterioration in the value of U.S. assets occurred in corporate and commercial real estate securities, the GFSR said, and problems are spreading to other financial sectors including insurance companies, pension funds, and hedge funds.

 

“For European and U.S. banks, our rough estimates indicate that at least half a trillion dollars is necessary to prevent their capital position from deteriorating further," Jaime Caruana, IMF's Financial Counsellor said. "We also emphasize the need to clean up banks' balance sheets to raise the level of confidence in the banking system."

 

The IMF warns that many banks around the world may have an insufficient capital cushion to weather a deep global economic downturn. Also, systemic concerns are rising for insurance companies and pension funds, the report says.

 

“The speed and size of the impact of the adverse feedback loop between the economy and the financial system has overwhelmed policy responses so far," the IMF said. Aggressive "actions by both policy makers and market participants are needed to ensure that the necessary deleveraging process is less disorderly

 

In particular, the report recommends a comprehensive and co-ordinated approach that incorporates:

Ø       Move expeditiously toward recapitalization and measures to deal with distressed assets. An assessment of bank's business plans should be done proactively by supervisors. The restructuring process might involve the use of a publicly-owned "bad bank" to remove distressed assets from the balance sheets of institutions.

 

Ø       Immediate, short-run policies and actions taken need to be consistent with the long-run vision for the structure of a viable financial system. Reaching higher bank capital ratios needs to be done in a gradual manner in order to avoid any additional adverse feedback effects and to encourage lending to healthy borrowers.

 

Ø      Transparency about policies, the use of public financial support, and decisions about the future of any individual financial institution. This applies in particular to the authorities' identification of bank problem assets, application of conditions to bank recapitalization, and the setting of capital levels that are adequate.

 

Ø      A high level of international co-operation on national financial policies to support institutions to prevent competitive distortions, regulatory arbitrage and excessive "national bias" that might harm other countries.

 

Press release

GFSR update January

 

© International Monetary Fund