The IMF’s spring Global Financial Stability Report said that should markets lose faith in the effectiveness of eurozone policies, rising funding costs and increased stresses within the banking system could force banks to rapidly reduce their balance sheets to raise capital buffers reports The Telegraph.
Under the scenario, the supply of eurozone credit would fall by 4.4 per cent and growth in the region would be cut by 1.4 per cent.
The sell-off among 58 of the biggest banks in the European Union included in the IMF’s analysis would be equivalent to 10 per cent of total assets, and the balance sheet adjustment would also involve a significant reduction in bank lending, it said.
The UK banks involved in the study were state-backed Royal Bank of Scotland and Lloyds Banking Group, as well as HSBC and Barclays. A second global credit crunch would make it more difficult still for UK households and businesses to borrow from banks.
“Such a large-scale deleveraging would have consequences well beyond the euro area. The fire sale of bank assets could have a significant impact on asset prices and market liquidity,” the IMF said.
José Viñals, director of Monetary and Capital Markets at the IMF, said that while policy actions in the eurozone had eased the sense of crisis, risks remained. “Policy actions have brought gains but current efforts are not enough to bring lasting stability. It is too soon to say we have exited the crisis. Pressures on European banks remain.”
The IMF said that banks would prioritise the disposal of non-core and foreign assets before moving onto home markets and lending reduction the higher the stress.
To achieve lasting global financial stability, the IMF said swift fiscal integration was needed in the eurozone, close regulation of banks, continued loose monetary policy, and a gradual withdrawal of fiscal support where possible.
“We need a vision of ‘more and better’ Europe,” said Mr Viñals. Even though it may be politically difficult to achieve, “a consensus needs to be agreed now,” he said.
The IMF also suggested eurozone countries should further increase its combined bailout funds to increase confidence in the region’s ability to deal with further shocks.