Speaking in New York ahead of next week’s IMF Spring meeting, Ms Lagarde launched a broadside against the financial services industry for resisting urgent reform, reports The Telegraph.
“In too many cases – from the United States in 2008 to Cyprus today – we have seen what happens when a banking sector chooses the quick buck over the lasting benefit, backing a business model that ultimately destabilizes the economy. We simply cannot have pre-crisis banking in a post-crisis world.
“We need reform, even in the face of intense pushback from an industry sometimes reluctant to abandon lucrative lines of business.”
Almost five years since Lehman Brothers collapsed, she claimed: “The ‘oversize banking’ model of too-big-to-fail is more dangerous than ever. We must get to the root of the problem with comprehensive and clear regulation.”
Regulators have forced banks to increase significantly their loss-absorbing capital buffers since the crisis, but are still working on “resolution” mechanisms that will allow giant lenders to fail without hitting the taxpayer and threatening financial stability.
Regulators must also work together, she added, amid evidence that some countries are caving into pressure from the banking lobby. “Financial sector reform efforts must be coordinated internationally. We are already seeing countries pulling in different directions in some areas, such as in calculating the riskiness of assets and curbing banking excesses,” Ms Lagarde said.
The eurozone has yet to grapple with its banking problems convincingly, which is harming efforts to revive growth in the region.
“Especially in the periphery, many banks are still in an early stage of repair – not enough capital and too many bad loans on their books. Even outside the periphery, there is a need to shrink balance sheets, reduce reliance on wholesale funding, and improve business models,” she said.
Because the banks are broken, cheap credit is not getting through to the parts of the economy that need it. “Because of insufficient financial repair, monetary policy is “spinning its wheels” – meaning that low interest rates are not translating into affordable credit for people who need it,” she said.
“So the priority must be to continue to clean up the banking system by recapitalising, restructuring, or – where necessary – shutting down banks.”
One option for eurozone would be “direct recapitalisation by the European Stability Mechanism”, the region’s bail-out fund, she added.
The UK is leading the field on bank reform, with the Bank of England last month demanding lenders find another £25bn of capital despite already being far better capitalised than European peers.
Ms Lagarde’s comments came as she said the global economy was improving and “no longer looks quite as dangerous as it did six months ago”. The world is now in a three speed recovery of countries doing well, such as the emerging markets, those “on the mend, like the US, and those that “still have some distance to travel”, like the eurozone.
“We know the future we want. We know the path to get there. The task before us now is to act, to make that future a reality, to get ahead – and stay ahead – of the crisis,” she said.