International Monetary Fund managing director Christine Lagarde has warned big banks are “more dangerous than ever” and called on Europe to recapitalise, restructure or shut down its biggest lenders as part of urgent reforms.
Lagarde was speaking in New York last week ahead of the IMF’s Spring meeting.
She said: “In too many cases – from the United States in 2008 to Cyprus today – we have seen what happens when a banking sector chooses the quick buck over the lasting benefit, backing a business model that ultimately destabilises the economy. We simply cannot have pre-crisis banking in a post-crisis world.
”The ’oversize banking’ model of too big to fail is more dangerous than ever. We must get to the root of the problem with comprehensive and clear regulation.”
Lagarde said in the periphery, many banks are still in an early stage of repair with not enough capital and too many bad loans on their books. Outside the periphery, there is a need to shrink balance sheets, reduce reliance on wholesale funding, and improve business models.
She said: “So the priority must be to continue to clean up the banking system by recapitalising, restructuring, or – where necessary – shutting down banks.”
British Bankers’ Association chief executive Anthony Browne says a number of steps have already been taken to ensure UK banks have sufficient capital and can be wound down in the event of failure.
He says: “There are three main steps that are being taken. The first is to ensure that banks are safer, that they are better able to withstand a crisis. This involves increasing their capital and liquidity, which is happening through Basel III. The second step is putting firewalls in place, so that if a bank does fail then there is less contagion of those around it, this is being done by strengthening market infrastructure – most notably by ensuring as much central clearing as possible of derivative trades. The third and probably most important step is developing recovery plans and the powers to implement them in the case that a bank does fail.
”As an industry, we have been agitating for the European Union and the UK to implement a whole series of reforms to end the problem of banks being too big to fail. Never again should taxpayers have to bail out banks.”