IMF on European Banking System: Restructure to Minimize the Risk

IMF on the European banking system

The International Monetary Fund (or IMF) said in its global financial stability report that European banks are facing various challenges. The profitability crisis is the major problem for European banks (IEV) (EZU) (VGK). Investors believe that these banks might not be able to clear their inheritance debt from their balance sheet, which is creating doubt in investors’ minds about whether these banks will be profitable or not in the future.

IMF on European Banking System: Restructure to Minimize the Risk

In the present scenario, we saw that Deutsche Bank (DB), a major European bank, saw a massive sell-off due to weaker revenue, sinking profits, and a decline in earnings. Deutsche Bank’s problems are creating nervousness in investors’ minds. Read, Is Deutsche Bank’s Trouble as Deep as Lehman’s Was?” to learn more.

According to the IMF’s survey of more than 280 banks across the US (QQQ) (SPY) (IVV) and Europe, cyclical recovery would be enough to push up the majority of US banks’ long-term profitabilities, while one-third of the European banks could fail.

In the above graph, we can see that Italy and Greece’s banking systems have the highest estimated capital loss on non-performing loans. According to the IMF, “Banks and policy makers need to tackle substantial structural challenges to survive in this new era.” $8.5 trillion in assets remained under risk.

What does the IMF recommend?

The IMF recommends some steps to reduce the risks that are threatening the European (VGK) (IEV) banking system. These steps will also reduce some risks to the global financial system.

  • The European banks need to resolve the non-performing loans on their balance sheet, which requires the banking system to fix its insolvency rules.
  • European banks also need to restructure their various branches. Those banks that have various branches across the region but only a very small amount of deposits should close some of their branches. Banks could cut operating expenses by $18 billion by moving more clients into digital banking.

In the next part of this series, we’ll analyze the global debt structure.