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IMF Says U.S. Banking System Might Need as Much as $76 Billion in Capital
The U.S. financial system remainsfragile and banks subjected to additional economic stress mightneed as much as $76 billion in capital, according to the resultsof International Monetary Fund stress tests.
The findings, released today as part of a broader IMFreport on the U.S. financial system, suggested that while thenation?s banking system is stable, it remains vulnerable. Homeprices, commercial real estate loans and economic growth havethe potential to cause shocks that could expose banks to morelosses.
Under one scenario, small and regional banks as well assubsidiaries of foreign banks would need $40.5 billion inadditional capital to meet a benchmark capital ratio of 6percent Tier 1 common equity from 2010 to 2014. Under theadverse scenario, those needs rise to $76.3 billion, accordingto the report.
?Pockets of vulnerabilities linger,? the fund said in thereport. The U.S. is recovering from what the IMF called ?one ofthe most devastating financial crises in a century.?
Because the economic recovery is proceeding slowly,regulators must be especially vigilant in guarding against risksand weak spots, the report said.
The IMF also renewed its call for the Obama administrationto push ahead with changes to Fannie Mae and Freddie Mac, thegovernment-sponsored enterprise housing companies. The reportsuggested a partial privatization strategy, in which thegovernment would take over the GSEs? public housing missionwhile privatizing investment operations.
Regulators? Role
The IMF stopped short of recommending recapitalizing thebanks it studied in the report. Instead, it urged regulators tomonitor conditions, especially for smaller institutions withless market access.
The numbers ?are not frightening,? said Christopher Towe,the IMF?s deputy director of monetary and capital markets whodirected the assessment. The review process was created in thewake of the Asian crisis, and the U.S. is the first majoreconomy to undergo it since the global financial turmoil.
?We are particularly concerned about the situation amongthe small and medium-sized banks, which are most heavily exposedto the commercial real estate sector,? he told reporters in apress briefing yesterday.
The IMF said second-quarter results underscore the balance-sheet risks identified by the stress tests. ?Initial releasesof second-quarter earnings results have been disappointing,?the IMF report said.
Real Estate
The IMF said about $1.4 trillion of commercial real estateloans will mature from 2010 to 2014, almost half of which arealready ?seriously delinquent,? with payments 90 days or morepast due, or ?underwater,? with loan values exceeding propertyvalues. Home prices are another concern, as are the spillovereffects if problems intensify as they spread among institutions.
U.S. regulators will need to step up their efforts tocoordinate oversight after the Dodd-Frank legislation thatPresident Barack Obama signed this month, the IMF said. Thereport generally praised the new law, while also flaggingongoing concerns.
?In some areas we were a little bit disappointed,? Towesaid. ?We see the system of regulatory agencies as stillremaining exceptionally complex with a very large number ofagencies involved and we would have preferred to have seen amuch more bold streamlining.?