Of Special Interest


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30th August 2011

IMF Chief in controversial boost bank capital call

Christine Lagarde, Managing Director of the International Monetary Fund called for the European authorities to ensure many banks had their capital boosted in order to end worries over contagion - "Banks need urgent recapitalisation. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis.". She was speaking at a banking Conference at Jackson Hole in the US. She went on to say there should be "mandatory substantial recapitalisation — seeking private resources first, but using public funds if necessary".

Many European bankers, analysts and commentators immediately jumped into the debate suggesting that Christine Lagarde did not know her capital requirements from her liquidity requirements. They suggested that during the last month some banks had found liquidity a problem there was no suggestion of a lack of capital. The same group pointed to the recent European stress test as evidence of this.

Lagarde played a central role during the banking crisis with regard to the formulation and execution of European policy and for this reason was the popular European choice for the top IMF job. Her call for urgent bank recapitalisation, the language she chose, and the forum she made the call in was a shock in Europe. It appears to have been unexpected by most and may have created a rift that not be easy to mend. Most alarming was the suggestion that public funds may need to be used to any great extent. The Stress test was applied to the top 91 banks which hold almost two thirds of European total banking assets. European banks have also to transform capital they do hold into that acceptable under Basel III. To be forced into excessively rushing this process would in itself create losses - though equally this should not be allowed to drift as an issue.