The US financial system remains fragile and banks subjected to additional economic stress might need as much as US$76 billion in capital, according to the results of IMF stress tests.
The findings, released yesterday as part of a broader IMF report on the US financial system, suggested that while the nation’s banking system is stable, it remains vulnerable. Home prices, commercial real estate loans and economic growth have the potential to cause shocks that could expose banks to more losses.
Under one scenario, small and regional banks as well as subsidiaries of foreign banks would need US$40.5 billion in additional capital to meet a benchmark capital ratio of 6 percent Tier 1 common equity from this year to 2014. Under the adverse scenario, those needs rise to US$76.3 billion, according to the report.
“Pockets of vulnerabilities linger,” the fund said in the report.
The US is recovering from what the IMF called “one of the most devastating financial crises in a century.”
Because the economic recovery is proceeding slowly, regulators must be especially vigilant in guarding against risks and weak spots, the report said.
The IMF also renewed its call for US President Barack Obama’s administration to push ahead with changes to Fannie Mae and Freddie Mac, the government-sponsored enterprise (GSE) housing companies. The report suggested a partial privatization strategy, in which the government would take over the GSEs’ public housing mission while privatizing investment operations.
The IMF stopped short of recommending recapitalizing the banks it studied in the report. Instead, it urged regulators to monitor conditions, especially for smaller institutions with less market access.
The numbers “are not frightening,” said Christopher Towe, the IMF’s deputy director of monetary and capital markets who directed the assessment. The review process was created in the wake of the Asian crisis and the US is the first major economy to undergo it since the global financial turmoil.
“We are particularly concerned about the situation among the small and medium-sized banks, which are most heavily exposed to the commercial real estate sector,” he told reporters in a press briefing on Thursday.
The IMF said second-quarter results underscore the balance-sheet risks identified by the stress tests.
“Initial releases of second-quarter earnings results have been disappointing,” the report said.
US regulators will need to step up their efforts to coordinate oversight after the Dodd-Frank legislation that Obama signed this month, the IMF said. The report generally praised the new law, while also flagging ongoing concerns.
“In some areas, we were a little bit disappointed,” Towe said. “We see the system of regulatory agencies as still remaining exceptionally complex with a very large number of agencies involved and we would have preferred to have seen a much more bold streamlining.”
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