WASHINGTON—Large banks now have stronger balance sheets as they emerge from the financial crisis, but work remains to be done in adjusting business models to reflect new economic realities of lower profitability and greater regulatory requirements, according to a new report from the International
Monetary Fund.
The IMF’s Global Stability Report examined 300 large banks in advanced countries and found that as a group they hold more capital than prior to the financial crisis. But it also found that of those banks 40% still do not have sustainable business models that can supply adequate credit to support the economic recovery.
The overhaul that is needed, recommends the IMF, is “likely to entail a combination of repricing current business lines, reallocating capital away from low-risk assets and — in some cases — selective retrenchment or even restructuring.” The IMF said that in the simulation it ran it found the repricing needed by some banks to close their return-on-equity gaps and generate sustainable profits may not be realistic, “particularly if done on a stand-alone basis and not followed by other market participants.” For example, 20% of banks would need to raise lending margins by more than 50 basis points on their entire loan book.