Policies to Address Banking Sector Weakness: Evolution of Financial Markets and Institutional Indicators
IMF Staff Position Notes, October 7, 2009
Source details
- Canonical URL
- Policies to Address Banking Sector Weakness: Evolution of Financial Markets and Institutional Indicators
Other formats
Bibliographic details
- Authors: Ivan S Guerra, R. B. Johnston, Karim Youssef, Andre O Santos
- Published: October 7, 2009
- Series: IMF Staff Position Notes
- DOI: https://doi.org/10.5089/9781455292585.004
Summary and context
- Paper reviews the impact of policies to address banking sector weaknesses through the first months of 2009.
- At the time of assessment:
- Central bank intervention had successfully addressed pressures on bank liquidity.
- Underlying financial position of financial institutions, particularly the large complex financial institutions (LCFIs), remained precarious.
- Tier 1 ratios had been boosted through capital injections, but tangible common equity (TCE) remained at a critical level for most institutions.
- Asset quality was weakening.
- Credit spreads for LCFIs remained wide.
- Measures had not stemmed the market-driven deleveraging process.
- Lending surveys pointed to various levels of credit tightening in the United States, Europe, Switzerland, and the United Kingdom.
Key findings on bank soundness and market functioning
- Liquidity
- Central bank interventions alleviated immediate liquidity pressures.
- Market-driven deleveraging continued despite liquidity support.
- Capital and equity
- Capital injections increased Tier 1 ratios.
- Tangible common equity (TCE) stayed at critical levels for most institutions.
- Asset quality and credit conditions
- Asset quality deteriorated during the period under review.
- Credit spreads for LCFIs remained wide, reflecting persistent market concerns.
- Lending surveys indicated credit tightening across multiple jurisdictions: United States, Europe, Switzerland, and the United Kingdom.
- Overall assessment
- The ultimate success of government support measures should be judged by their impact on bank soundness indicators: liquidity, profitability, capital adequacy, and asset quality.
Policy implications and recommended assessment criteria
- Government support measures should aim to have a positive effect on bank soundness by improving:
- Bank liquidity.
- Profitability.
- Capital adequacy.
- Asset quality.