Forget too-big-to-fail, new concern is that many banks are too-weak-to-survive

Firms with over $11 trillion in assets would remain troubled even if interest rates rise, IMF says in new report

A third of biggest banks in the world’s richest countries are so weak their problems could not be solved even by a recovery and rising interest rates, the International Monetary Fund said in a new report released Wednesday.

About a third of European banks, with $8.5 trillion in assets, and a quarter of U.S. banks, with $3.2 trillion in assets, are in this too-weak-to-recover category, the IMF said.

“This suggests the need for fundamental changes in both bank business models and system structure to ensure a vibrant and healthy banking system,” the IMF said in its update on global financial stability.

Overall, bank balance sheets in general are stronger than they were before the financial crisis. But weak bank profitability has emerged as a key challenge that won’t be solved by a cyclical recovery.

In particular, euro-area banks are earning less than half their 2004-2006 average profits.

In part, this is due to the challenging economic environment and low, even negative, interest rates, the IMF said.

Regulators have also curtailed banking activity in capital market businesses.

Revenue from market making and derivatives trading is one-third lower than during the pre-crisis period, the IMF estimated.

The IMF report called for urgent and comprehensive action, stressing that reform, especially in many European countries, “can no longer be postponed.”

“In some cases, weak banks will have to exit and banking systems will have to shrink,” the report concluded.

Full article: Forget too-big-to-fail, new concern is that many banks are too-weak-to-survive (MarketWatch)

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