The head of the International Monetary Fund has made a dramatic intervention in the debate over the health of the European banking sector, saying the problems are the result of their failure to follow the US in carrying out tough reforms in the wake of the global financial crisis.
In an exclusive interview with Emerging Markets, Christine Lagarde said she was concerned by “market trepidation around one Italian Bank, one German bank and questions around some of the more southern European countries’ banking systems”.
Last week shares in Germany’s Deutsche Bank fall sharply amid concerns over whether it could survive the impact of a $14bn fine by US authorities, while Monte dei Paschi, Italy’s third-largest bank, has been ordered by the European Central Bank to reduce its holdings of bad debts. “This is not to say that all banks are in a difficult situation in Europe but some of them really need to be addressed,” she said.
“These institutions need to be managed because one of [them] is of systemic importance, and it is a very large institution — a complex one too. I think the authorities are aware that measures have to be taken. They are disposing of certain assets and considering disposing of further assets and strengthening the structure of the bank [concerned].”
Lagarde said the big difference between the US and Europe was that the US took “very abrupt and heavy duty measures to fix the financial sector, to fix the banks back in 2009 and to deal with the non-performing loans and the lack of capital”.
US authorities “went heavy” on reform “whereas the Europeans did not do that and did not deal with non-performing loans as promptly as the US and did not take [such] hard-line measures. The financial sector, which was the big weakness of the financial crisis, was addressed head on and very promptly by US authorities whereas it was not the case in Europe. I think the Europeans are dragging things.”
She said that “a lot of good things have been done in the financial sector in terms of improved regulatory environment, improved supervision, better co-operation between regulators and supervisors”.
“When we look at the banks there is clearly a stronger capital structure and more buffers. We have ‘living wills’ in place and we have in many instances bailing-in mechanisms that have been framed. Those are the positives since the global financial crisis.”
But, she said, “with interest rates at the zero lower bound or less than zero lower bound [that] is clearly transforming the paradigm in which banks are operating. The second factor which has changed is the development of the non-bank financial sector or shadow banking sector.”
The IMF head meanwhile expressed concerns to Emerging Markets over what she called the trend toward “reversal” of the process of globalisation.