The International Monetary Fund is warning the euro zone debt crisis has left the region’s banks vulnerable and they will need to urgently raise around 300 billion euros in fresh capital to cover potential losses.
In its Global Financial Stability Report, the IMF said this is a worldwide problem but European banks are particularly weak and as many as 15 lenders could fail.
The report did not measure bank capital needs, which the IMF said would have to be determined by fully fledged stress tests to identify balance sheet assets, income or losses.
Earlier this month, IMF Managing Director Christine Lagarde drew fire from European officials when she called for a mandatory recapitalisation of Europe’s banks.
News reports last month said the IMF had identified a 200 billion euro shortfall in European bank capital, but officials in Europe insisted the figure was off the mark and the capital position of most banks in the region was solid.
European officials stood by bank stress tests they conducted in July that found only eight banks deficient in capital with a combined shortfall of only 2.5 billion euros, a figure widely criticised as too low and politically skewed.
The IMF’s report on Wednesday made clear the 200 billion figure was not a hard measure of a capital shortfall. Instead, it measured how risk exposure had increased as sovereign debt prices had fallen.
It said a further 100 billion euro increase in exposure was related to a recent decline in bank asset prices and rise in bank funding costs. The report said banks should raise capital privately although public funds may be necessary for viable banks.
Lagarde had said Europe might need to consider tapping its sovereign debt bailout fund to bolster banks.
The IMF said the damage could spread from Europe to banks in emerging market economies. It said banks in Latin America were most vulnerable, while banks in Asia and eastern Europe were more sensitive to increases in funding costs.
The report said political differences among European policymakers on providing support for crisis-hit countries in the euro zone periphery slowed Europe’s crisis response and rattled confidence.
It also said there were growing doubts that political leaders in the United States could agree on ways to lower US budget deficits over the medium-term, which it called critical for global financial stability because of the status of the US dollar as a reserve currency.