Transcript of the Global Financial Stability Report Press Conference with Jose Viñals, Financial Counsellor and Director of the Monetary and Capital Markets Department

IMF News, September 30, 2009

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Transcript of the Global Financial Stability Report Press Conference with Jose Viñals, Financial Counsellor and Director of the Monetary and Capital Markets Department

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• Published: September 30, 2009

Overall assessment of the global financial system

• Two factors explain the marked improvement since the Lehman Brothers bankruptcy: unprecedented policy actions and overall improvement in economic prospects.
• Systemic risk in mature economies has been reduced by liquidity injections, bank balance sheet stabilization, and restoration of credit market functioning.
• Return of stability has lowered the broad estimate of global write-downs for banks and nonbank financial institutions to roughly $3.4 trillion, which is around $600 billion lower than the last GFSR, largely because of rising security values.
• Despite stabilization, risks remain and complacency by private sector or policymakers could re-ignite systemic risks and derail the recovery.

Bank write-downs, capital recognition, and capital needs

• Improved methodology leads to a revised estimate that about $1.5 trillion in bank write-downs is yet to be recognized, slightly more than the $1.3 trillion acknowledged thus far.
• Loss recognition has proceeded faster for securities (mark-to-market) than for loans; remaining losses are concentrated in loan books and expected to materialize as the credit cycle advances.
• Regional recognition differences reflect accounting conventions, reporting frequency, and cycle timing; in the United States a bit more than half of losses have been recognized, while in the Euro Area and Britain a bit less than half have been recognized.
• Capital positions and earnings have substantially improved and significant capital has been raised, but:
  • If the reference is a capital ratio that regulators consider a minimum, bank balance sheets have been stabilized.
  • If the question is whether banks have enough capital to supply sufficient credit to support the recovery, the answer is no — a substantial need for additional capital remains to support credit supply and guard against future shocks.
• Indicative additional capital needs by area (as described in the report):
  • United States: a bit above 1 percent of total consolidated assets of the banking system.
  • Euro Area: a little bit more than 1 percent.
  • United Kingdom: a little bit more than 1 percent.
  • Mature Europe (Denmark, Iceland, Norway, Sweden, Switzerland): a bit more than 2 percent.
• Emphasis on capital conservation: avoid large equity buybacks and dividend payouts while building towards “more and better capital.”

Funding profiles and near-term maturities

• Banks face a “wall of maturities” of around $1.5 trillion of debt over the next 2-3 years.
• It is vital banks use favorable market conditions to improve funding profiles and reduce potential need for government-backed funding support.

Credit supply, demand, and fiscal consequences

• Private sector credit growth continues to contract across major economies due to weak activity and household deleveraging; financing capacity of bank and nonbank sectors remains limited.
• Total borrowing needs are sustained by burgeoning public sector deficits, causing constrained credit availability.
• Fiscal risks: a 1 percentage point increase in the deficit relative to GDP increases long-term interest rates by 10-60 basis points, compounding adverse public debt dynamics. Countries with high debt-to-GDP ratios and large contingent liabilities are particularly vulnerable.

Emerging markets and regional considerations

• Emerging market conditions have significantly improved: portfolio flows have rebounded; sovereign and corporate debt spreads narrowed; domestic credit conditions generally stabilized.
• Risks in emerging markets:
  • Emerging market corporates face sizable foreign currency debt refinancing over the next two years.
  • Access for some investment grade borrowers remains restricted.
  • Countries with external/domestic imbalances and heavy reliance on cross-border banking flows remain vulnerable.
• Asia:
  • China’s domestic credit is growing very fast; IMF flags a risk that rapid credit growth could lead to asset price bubbles if unchecked, though not asserting this is already occurring.
  • Authorities should balance credit growth to support recovery while avoiding financial imbalances; monitor credit quality to prevent future nonperforming loans.
  • Asian banks show low loss rates relative to other regions: they had limited subprime-related exposure and solid liability structures; IMF did not focus on specific capital needs for Asian banks as for Western banks.
• Central and Eastern Europe:
  • Situation has improved with reasonable amounts of capital and provisions in many banking systems.
  • Concern remains about reduced cross-border bank flows that have not been fully replaced by other capital inflows; corporate refinancing needs are significant and require vigilance.
• Turkey:
  • Report does not specifically focus on Turkey but notes relative vulnerability in corporate sector refinancing compared with other emerging markets.
  • Strengths cited: strong domestic funding base, low reliance on foreign funding, low exposure to toxic products, and strong capital, profits, and liquidity; central bank actions (rate cuts and liquidity provision) have helped underpin stability.

Securitization, covered bonds, and restructuring

• Securitization: report calls for repairing securitization markets to be “simpler, safer and more transparent” — retaining benefits of risk transfer while avoiding past excesses.
  • Required measures include aligned incentives, credit agency oversight, adjusted capital charges, and retention policies (“skin in the game”) designed to promote proper market functioning.
• Covered bonds: useful funding source where legal frameworks exist and have a track record.
• Restructuring: fiscal and financial support should include restructuring measures to produce an efficient banking system able to support recovery; Spanish Restructuring Fund cited as an important example for addressing real estate and developer credit exposures.

Policy recommendations and priorities

• Four key policy challenges:

1. Strengthen bank balance sheets and capital to ensure sufficient credit capacity; address bank balance sheet problems and encourage revival of securitization. 2. Manage the delicate balance between maintaining policy interventions and withdrawing support to the financial system — exit strategies must preserve financial stability and be internationally consistent. 3. Prudently manage sovereign balance sheets; pursue medium-term fiscal consolidation to avoid crowding out private borrowers or triggering future public debt crises. 4. Adopt financial regulatory reforms that minimize likelihood of future crises.

• If credit capacity is not restored by bank/market adjustments, central banks may need to continue credit and quantitative easing policies to prevent rising interest rates or tightening credit conditions.
• Emphasize a combination of capital raising, dealing with impaired assets, and capital conservation as complementary actions to restore credit supply.

Q&A highlights and analytical notes

• U.K. vulnerability to a funding gap: tension between elevated total credit demand (public plus private) and a deleveraging banking sector that supplies most credit; absent continued authority support, lending rates may rise or credit could be constrained.
• Lender of last resort issues: cross-border banking interventions have blurred lines between capital support from home governments and host-country central bank support; public interventions have helped keep subsidiaries functioning and providing credit in emerging markets.
• Stress tests in Europe: EU authorities are conducting stress tests of main banking groups; many EU countries also conduct internal supervisory stress tests; disclosure decisions will involve ECOFIN.
• Fiscal-to-sovereign-risk linkage: Table on page 33 links financial crisis to sovereign risk sensitivity — countries with high debt burdens and large potential financial-sector liabilities exhibit greater sensitivity of sovereign risk to common shocks (as reflected in widening bank credit default swaps).
• Impaired assets recognition: slower recognition of loan losses in some regions due to less advanced credit cycle, accounting differences, prevalence of small banks not reporting under IFRS, and lower reporting frequency.
• Capital needs are also reduced if banks successfully shed problem assets; U.S. banks have been more successful recently in raising capital than European peers.

Transcript of the Global Financial Stability Report press conference, September 30, 2009.

References

• Spain and the IMF
• Nigeria and the IMF
• Republic of Türkiye and the IMF
• United States and the IMF
• People's Republic of China and the IMF
• Transcripts
• PRESS CENTER
• Webcast
• https://www.imf.org/en/home