IMF's Lagarde: Some eurozone banks may need to close

Agence France-Presse

Posted at Apr 11 2013 08:36 AM | Updated as of Apr 11 2013 04:36 PM

NEW YORK - International Monetary Fund chief Christine Lagarde on Wednesday called on European authorities to step up banking system reform, including closing some banks if necessary.

The debt-wracked eurozone has achieved major accomplishments, including setting up the European Stability Mechanism, the rescue fund for members of the 17-nation bloc, but more needs to be done, Lagarde said in a speech to the Economic Club of New York.

Insufficient work to rebuild the strength of commercial banks has prevented accommodative monetary policy of having the desired effect of pushing affordable credit out to borrowers, she said.

"So the priority must be to continue to clean up the banking system by recapitalizing, restructuring, or -- where necessary -- shutting down banks," Lagarde said, according to the prepared text of the speech.

Cyprus last week agreed to financial sector restructuring, including winding down its second-largest bank, Laiki, to receive an international bailout.

According to Lagarde, many banks in the eurozone periphery states are under-capitalized and have too many bad loans on their books.

"Even outside the periphery, there is a need to shrink balance sheets... and improve business models," she said.

Speaking just days ahead of the release of the IMF's latest global economic forecasts, the IMF managing director said the institution does not expect growth to be much higher this year than in 2012.

"The bottom line is that we need a global financial system that supports stability and growth," 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 destabilizes the economy."

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