Sunday 4 December 2016

IMF warns on deposit flight if euro debt crisis deepens

Emmet Oliver, Deputy Business Editor

Published 22/09/2011 | 11:12

Protesters from the Greek trade union PAME shout slogans in front of the parliament in Athens yesterday during a rally against the government's plans for
new austerity measures
Protesters from the Greek trade union PAME shout slogans in front of the parliament in Athens yesterday during a rally against the government's plans for new austerity measures

EUROPEAN banks, including those in Ireland, could suffer dangerous withdrawls of cash if bank funding markets seize up due to the euro crisis, the IMF has warned in a report on global stability.

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It comes as senior European banks remain under severe pressure, with reports last night suggesting that one of France's largest banks, BNP Paribas, plans to raise money in the Middle-East.

Meanwhile Lloyds of London, the insurer, has pulled its deposits from certain peripheral markets and is monitoring the European banking market closely in relation to other countries. The IMF meanwhile also issued a controversial finding that European banks are facing potential losses of €200bn due to Europe's sovereign debt crisis.

It shied away from saying this was the amount of capital needed, but the release of the figure is still likely to make bank shareholders nervous.

MAJOR OUTFLOWS

Ireland suffered major outflows of funds during 2009 and 2010, but the position has stabilised in recent months in line with improving bond spreads.

But the IMF report makes clear that wholesale funding markets may become disrupted because of the euro crisis, causing significant issues for banks in Ireland, and also in Greece.

"The disruption in euro area wholesale funding markets could also spread to depositor funding,'' it says.

"At banks in Greece and Ireland, both wholesale and customer deposits have fallen since the end of 2009. It is essential to prevent these withdrawals from moving into a more virulent phase, as has happened in past emerging market crises,'' the report states.

The warnings was issued on a day when other bodies also expressed worry about where the banking sector is heading.

The European Systemic Risk Board, Europe's risk watchdog, said threats to the financial system have increased "considerably" as the region's sovereign debt crisis weakens economic growth and pressures banks.

In a finding that has enraged some European politicans, the The IMF said that the hit to European banks from the sovereign debt crisis could hit €200bn, but could even rise to €300bn under certain scenarios. The figures relate to the holdings of peripheral countries held by European banks and the capital that would be needed if these assets were marked to market.

"The euro area sovereign credit strain from high-spread countries is estimated to have had a direct impact of about €200bn on banks in the European Union since the outbreak of the sovereign debt crisis in 2010,'' the report claimed.

Reflecting the sensitivities over the issue, the report shies away from directly saying European banks will need €200bn of fresh capital. The €200bn figure is simply trying to say what the potential losses in the system are, the report explains.

PROBLEM

This estimate does not measure the capital needs of banks, which would require a full assessment of bank balance sheets and income positions.

Rather, it seeks to approximate the increase in sovereign credit risk experienced by banks over the past two years,'' states the report.

"Because banks lend to banks, the system is highly interconnected, both within and across borders.

"Consequently, the banking system can amplify the size of the original sovereign shock through funding markets. Indeed, sovereign spillovers have also had an impact on bank funding markets''.

The report makes it clear that its not only banks that hold assets from peripheral countries, with insurance companies also crucial.

"Insurance companies have also been affected by sovereign credit risk spillovers through their direct holdings of both sovereign and bank debt," it said.

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