European banks are too weak to support recovery in single currency bloc, IMF warns

European banks are too weak to support the recovery in the single currency bloc six years after the financial crisis struck, according to a leading global watchdog.



The International Monetary Fund said that although lenders around the world are safer than they have been for some time they ‘may not be strong enough to vigorously support the recovery’.



The Washington-based institution said the problem is particularly acute in the eurozone, where banks holding 70 per cent of total assets are unable to increase lending at an adequate rate. A fragile banking system has left businesses across the region starved of the cash they need to invest, create jobs and drive the economic recovery.



No crystal ball: José Viñals, head of financial stability at the IMF, right, with his deputy Andrea Maechler

‘The good news is that banks are much safer now, having increased their capital levels and liquidity,’ said José Viñals, the IMF’s head of financial stability. ‘However, many banks do not have the financial muscle to provide enough credit to vigorously support the recovery.



‘In other words, when banks are receiving a clean bill of health in terms of capital adequacy, it means that they are safe enough to lead a normal life. But in many countries, we need banks to be athletes who can vigorously support the recovery.’

The warning came as the Fund outlined a series of risks to the global economy in its twice-yearly Global Financial Stability Report – including ultra-low interest rates and excessive financial risk taking.



In its World Economic Outlook report published on Tuesday, the Fund warned that the eurozone is heading for its third recession since the financial crisis and a devastating bout of deflation. But Viñals admitted the Fund did not know what would trigger the next crisis, saying: ‘We don’t have a crystal ball.’



By contrast, the Fund said the UK and the US ‘are approaching economic lift-off as confidence in the recovery has progressed’. Britain is expected to be the fastest-growing economy in the developed world this year – expanding at more than twice the pace of Germany and eight times as fast as France.



The IMF yesterday called for an overhaul of banks’ business models in the single currency bloc, including consolidation in the sector to eliminate weaker lenders.



It said the upcoming results of the European Central Bank’s health check on lenders in the region ‘provides a strong starting point for these much-needed changes in bank business models’.



The Financial Stability Report also warned that ultra-low interest rates pose a threat to the global economy as they encourage excessive risk-taking by ‘complacent’ investors.



It said that six years after the start of the crisis the recovery around the world ‘continues to rely heavily’ on low interest rates in the West. But it added that the prolonged period of low rates – they have been frozen at 0.5 per cent in the UK since March 2009, for example – ‘may also encourage excessive financial risk-taking’.



‘Risks have increased to levels that could compromise financial stability if left unaddressed,’ said Viñals.



But while potentially dangerous financial risk-taking has increased, the IMF said business and consumer confidence ‘remains fragile in many areas’ including the eurozone. Viñals said a crisis of confidence ‘continues to impede greater economic risk-taking’ – the sort required to encourage businesses to ramp up investment and take on new staff.

