WASHINGTON — Big banks still pose a threat to the world financial system because there is a general assumption that governments will come to their rescue in case of trouble, according to an International Monetary Fund (IMF) executive.
“It is astonishing that officials in countries are still largely ill-equipped to deal with a Lehman Brothers-style bankruptcy, where assets and liabilities are scattered across multiple jurisdictions and entities,” Jose Vinals, tasked with financial oversight at the IMF, said in a blog post.
The 2008 bankruptcy of investment bank Lehman Brothers marked the height of the global credit crisis, and many of the reforms that have since been implemented were aimed at preventing a repeat of such a collapse.
During the financial crisis, a number of the world’s big banks were bailed out by governments with billions of dollars in taxpayer money.
“The not-so-good news is that, despite these efforts, implicit subsidies to these systemically important financial institutions remain too large,” Vinals said, noting that a related IMF study was due in April.
The problem of so-called too-big-to-fail banks is a priority for regulators in the Group of 20 (G-20), which is due to convene in November and expected to discuss a global financial reform agenda, Vinals said.
The G-20 includes Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the UK, the United States and the European Union.
The Basel III bank capital rules require banks to borrow less to fund their business, so they are better able to deal with problems. Governments have also told banks to draw up plans that would enable them to systematically unwind their businesses if the necessity arose.
The United States and Europe are putting into place so-called resolution authorities that would protect the wider financial system without the use of taxpayer funds in the event a bank needed to be bailed out.
Vinals said the G-20 had “yet to do much of the heavy lifting” to sort out what would happen if a bank with major operations abroad were to go under.
US and European regulators fined banks record amounts last year, imposing penalties and settlements of more than $43 billion as authorities work more closely across borders to clean up the financial sector.
Banks in the United States and Europe are paying for misconduct that includes mis-selling US mortgage bonds, rigging interest rates, and risky transactions such as JPMorgan’s “London Whale” trades.
Regulators across the globe are making banks dig far deeper than in the past for their misdeeds, led by US authorities who have long been more aggressive and imposed penalties more than 10 times those meted out in Europe.
Fines and settlements paid to US federal and state authorities have cost banks more than $40 billion last year, according to Reuters estimates, led by JPMorgan’s record $13 billion payout to a number of regulators for mis-selling mortgage bonds.
