IMF / GLOBAL FINANCIAL STABILITY REPORT

05-Oct-2016 00:02:08
A new International Monetary Fund (IMF) report says that financial stability risks that were bright on the radar screen six months ago - including Brexit and its possible global repercussions, high levels of corporate indebtedness in emerging markets, and uncertainties about China’s growth transition - have abated. IMF
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STORY: IMF / GLOBAL FINANCIAL STABILITY REPORT
TRT: 2:08
SOURCE: IMF
RESTRICTIONS: NONE
LANGUAGES: ENGLISH / NATS

DATELINE: 5 OCTOBER 2016 WASHINGTON DC
SHOTLIST
1. Wide shot, officials on the stage
2. Wide shot, journalists
3. SOUNDBITE (English) Peter Dattels, Deputy Director, Monetary and Capital Markets Department, International Monetary Fund (IMF):
“Since the crisis, enhanced regulation and oversight have strengthened banks capital and liquidity positions, making them safer. However, this new era of low growth and low rates threatens to undermine these hard-won gains.”
4. Med shot, journalists
5. SOUNDBITE (English) Peter Dattels, Deputy Director, Monetary and Capital Markets Department, International Monetary Fund (IMF):
“A large majority of the U.S. banking system returns to healthy profit levels of profitability, but some weaknesses remain. In contrast, in Europe almost one-third of the system, representing some $8.5 trillion remains weak and unable to generate sustainable profits. We are convinced that banks and policymakers need to tackle substantial structural challenges to survive in this new era.”
6. Close up, reporter asking question
7. SOUNDBITE (English) Peter Dattels, Deputy Director, Monetary and Capital Markets Department, International Monetary Fund (IMF):
“Deutsche Bank is a large and interconnected bank and is therefore of systemic importance domestically and globally. And, in that context, we’re confident that German and European authorities are monitoring the situation and working to ensure the financial system remains resilient.”
8. Close up, reporters
9. SOUNDBITE (English) Matthew Jones, Assistant Director, Monetary and Capital Markets Department, International Monetary Fund (IMF):
“The big four Chinese banks have seen increasing non-performing loan ratios as their asset quality starts to deteriorate. And, I think they’ve been quite active in removing some of those assets from their banks, which I think is a helpful initiative. One of the policy recommendations that we make in the report about China and the banking system is the need to strengthen the balance sheets and the capital positions of the banks. And, obviously, removing the non-performing loans is a part of that process.”
10. Med shot, reporters
11. Wide shot, IMF officials at end of briefing
STORYLINE
Financial stability risks that were bright on the radar screen six months ago—including Brexit and its possible global repercussions, high levels of corporate indebtedness in emerging markets, and uncertainties about China’s growth transition—have abated, according to the International Monetary Fund’s latest Global Financial Stability Report.

However, medium-term risks are building because we are entering a new era, characterized by chronic weak growth, prolonged low interest rates, and growing political and policy uncertainty, according to the report.

The Deputy Director of the IMF’s Monetary and Capital Markets Department Peter Dattels told reporters in Washington DC today (05 Oct) “since the crisis, enhanced regulation and oversight have strengthened banks capital and liquidity positions, making them safer. However, this new era of low growth and low rates threatens to undermine these hard-won gains.”

Low, uneven, and unequal growth risks are opening the door to more populist and inward-looking policies, leading to a loss of political cohesion and a rise in policy uncertainty in some countries, the IMF said.

One outcome of this weak economic environment and heavy reliance on unconventional monetary policies is financial markets expect negative policy interest rates in the euro area and Japan to last through the end of this decade. An unprecedented result is that almost 40 percent of advanced economy government bonds carry negative yields.

Financial stability now depends on how well financial institutions adapt to this new era, according to the IMF. Since the crisis, enhanced regulation and oversight have strengthened banks’ capital and liquidity buffers, making them safer. However, this new era of low growth and low rates threatens to undermine these gains.

Markets have serious concerns about the ability of many banks to remain viable and healthy, and whether economic recovery is sufficient to restore sustainable profitability. The report includes a detailed bottom-up exercise on more than 280 banks, covering roughly 70 percent of the banking systems in the United States and Europe.

The analysis finds that a cyclical recovery will not resolve the problem of weak banks.

“A large majority of the U.S. banking system returns to healthy profit levels of profitability, but some weaknesses remain. In contrast, in Europe almost one-third of the system, representing some $8.5 trillion remains weak and unable to generate sustainable profits. We are convinced that banks and policymakers need to tackle substantial structural challenges to survive in this new era,” said Dattels.

First, European banks need to resolve the legacy of nonperforming loans. This requires supportive policy action to strengthen insolvency and recovery regimes to reduce foreclosure times. If this were to be achieved, it would turn a capital cost of removing nonperforming loans of about €80 billion euros into a benefit to capital of about €60 billion euros.

Second, European banks need to become more efficient. There are simply too many branches with too few deposits and too many banks with funding costs well above their peers. Addressing these business model challenges is vital to ensure sustainable profitability.

Third, weak banks will have to exit and some banking systems will have to shrink. This will ensure a vibrant banking system that supports economic recovery.

Fourth, policymakers have to complete regulatory reforms to reduce uncertainty without an across-the-board increase in capital requirements.

According to IMF, undertaking these structural reforms would improve profitability in European banks by over $40 billion annually. And combined with a cyclical recovery, these structural reforms would improve the share of healthy European banks to over 70 percent.

Dattels addressed market concerns about the financial strength of Deutsche Bank. The U.S. Department of Justice has asked Germany’s largest lender to pay up to $14 billion to settle claims tied to sales of U.S. mortgage-backed securities before the financial crisis.

Dattels said “Deutsche Bank is a large and interconnected bank and is therefore of systemic importance domestically and globally. And, in that context, we’re confident that German and European authorities are monitoring the situation and working to ensure the financial system remains resilient.”

Emerging markets must adapt to the new era of lower global growth, lower commodity prices, and reduced global trade, according to the IMF. Low interest rates and investors' search for higher returns on their investments present an opportunity for highly indebted firms to restructure their balance sheets and reduce the burden of higher debt levels.

Corporate debt in many emerging markets may have peaked, since firms have slashed investment in the wake of commodity price declines, reducing the need for borrowing. These trends are helping to slow the rate of growth of credit to the private sector, and reducing the level of excess credit.

Banks in most emerging markets appear to have sufficient capital and liquidity to cushion their current holdings of nonperforming loans. The bad news is that, while debt may have peaked, defaults are likely to rise further. The report finds that larger bank buffers are needed in several emerging markets. To insure against this, authorities need to address corporate vulnerabilities, including through swift recognition of nonperforming loans and strong of insolvency frameworks.

In China, credit continues to grow rapidly. An increasing share is being packaged into complex and opaque credit products, proliferating outside of the traditional banking sector. These credit products are ending up on smaller Chinese banks’ balance sheets, with exposure that, in many cases, far exceeds their capital, adding to financial system risks from highly indebted corporates, the IMF said.

The Assistant Director of IMF Monetary and Capital Markets Department Matthew Jones said “the big four Chinese banks have seen increasing non-performing loan ratios as their asset quality starts to deteriorate. And, I think they’ve been quite active in removing some of those assets from their banks, which I think is a helpful initiative. One of the policy recommendations that we make in the report about China and the banking system is the need to strengthen the balance sheets and the capital positions of the banks. And, obviously, removing the non-performing loans is a part of that process.”
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