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Fix banks or face an even deeper crisis, IMF warns

A growing trend towards excessive risk-taking and lack of action to repair broken bank balance sheets could trigger a "chronic" new phase in the financial crisis, the International Monetary Fund (IMF) has warned.

The IMF said that, while near-term risks had abated in response to loose central bank policies, reforms to repair ailing banks were not yet complete and could pose a threat to future stability, particularly in Europe.

"While major UK and core euro area banks have been actively de-risking and deleveraging ... more needs to be done to complete the repair of their balance sheets," the IMF said in its half-yearly Global Financial Stability Report.

The comments came as Jens Weidmann, Germany's central bank chief, warned that Europe could take 10 years to recover from the crippling debt crisis.

"Overcoming the crisis and the crisis effects will remain a challenge over the next decade," Mr Weidmann told 'The Wall Street Journal'.

"The calm that we are currently seeing might be treacherous (if countries delay reforms)."

Mr Weidmann, who is a governing council member of the European Central Bank, said that the ECB could cut its benchmark interest rate from a historic low of 0.75pc if new information warranted action.

However, he added: "I don't think that the monetary policy stance is the key issue.


"Everyone is asking 'what more can the central bank do' instead of asking what other policymakers can contribute."

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The IMF said that recent events in Cyprus were an "important reminder of the fragility of market confidence".

It urged governments to make "sustained progress" with implementing a banking union.

It warned that euro periphery banks such as those in Spain and Portugal faced a large overhang of debt – equivalent to up to a fifth of total liabilities – which they would struggle to finance.

"Without greater urgency towards international co-operation and comprehensive bank restructuring, weak bank balance sheets will continue to weigh on the recovery and pose ongoing risks to global stability," the IMF said.

It also found evidence in the United States that "accommodative monetary policies are bringing about an intended shift toward risky assets".

"Higher borrowing in an environment of slower earnings growth is boosting corporate leverage, reversing the post-crisis trend of maintaining conservative balance sheets," the IMF said.

"A prolonged period of low interest rates may create incentives to increase leverage beyond manageable levels, extend the decay in underwriting standards and reinforce the search for yield." (© Daily Telegraph, London)

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