The IMF fears that numerous banks taking the drastic action required to repair their balance sheets could cause significant problems if done simultaneously. According to the IMF, it is “essential to continue to avoid a synchronised, large-scale, and aggressive trimming of balance sheets that could do serious damage to asset prices, credit supply, and economic activity in Europe and beyond.” The IMF currently expects over half of the major European banks to downsize by up to €2.6 billion by the end of next year.
Speaking about the potential risks, an IMF spokesperson said “Pressures on European banks remain elevated. Banks are coping with sovereign risks, weak economic growth, high rollover requirements, and the need to strengthen capital cushions to regain investor confidence. Together, these pressures have induced a broad-based drive to reduce the size of bank balance sheets. Although some deleveraging is both inevitable and desirable, its precise impact depends on the nature, pace and scale of asset shedding.”
“The path ahead has significant political and implementation risks, and policies need to be further strengthened to secure and entrench financial stability. Policymakers should therefore build on recently agreed reforms and complete the policy agenda” they added “Policymakers also need to co-ordinate a careful mix of financial, macroeconomic and structural policies to ensure a smooth deleveraging process that puts the financial system in a good position to support the economy.”
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