London's financial district.Lefteris Pitarakis
The primary purpose of the International Monetary Fund's bi-annual Global Financial System Review, of GFSR, is to focus the mind. The fund achieves its goal by throwing around numbers.
In its latest report, released Tuesday in Washington, the fund's message could be summed up this way: yes, the financial crisis is behind us, but there is razor-thin margin for error. The IMF says governments should resist the urge to pull the plug on the support measures they created for their banks. Too many of the world's financial institutions remain too shaky to be left to walk on their own.
José Vinals, director of the monetary and capital markets department, is especially worried about the more than $4-trillion (U.S.) in debt that banks must refinance over the next 24 months. Mr. Vinals warned about this in April and he's disappointed that no one seems to be listening. "There has been little progress in lengthening the maturity of their funding," the IMF says in the GFSR.
If the recovery was stronger, this probably wouldn't be such a concern. Unfortunately, the recovery isn't strong, as fears about a "double-dip" recession linger. If the worst-case scenario came to pass, it's a safe bet that banks would have to offer significantly higher yields on their bonds than they are currently paying. Banks also will be competing with a massive supply of government debt over the next couple of years, which also could push up their funding costs.
Refunding is an especially pressing concern for continental Europe, where banks depend on wholesale debt markets for 40 per cent of their funding, compared with about 25 per cent in the U.S., Japan and Britain, which back more of their lending with the deposits. (European banks' balance sheets tend to be larger than U.S. banks because European lenders keep their mortgages and public-sector lending on their books. In the U.S., most of the mortgage-lending is backed by government agencies such as Fannie Mae and municipalities seek funds by selling bonds rather than borrowing from banks.)
The other big number in the GFSR is this one: $13-billion. That's the amount of capital five large banks would have to raise to maintain a tier 1 common capital ratio of 4 per cent if there was a "double dip" in real estate prices, according to a stress test the IMF ran on the U.S.'s 40 biggest bank holding companies. That number would be much bigger if Fannie Mae and the other government-backed housing agencies weren't responsible for almost all of the new home lending.
The IMF remains extremely concerned about the state of the U.S. real estate market. Under the fund's double-dip house price scenario, without capital injections, credit growth would average 10 per cent between 2010 and 2012, low by historic levels.
Credit growth averaged 23 per cent between 1993 and 1996, following the Savings and Loan crisis, and 15 per cent between 2004 and 2007, after the recession of 2002-2003.