“The International Monetary Fund’s No. 2 official urged policy makers to clean up banks and strengthen oversight of their financial systems or risk stalling a recent rally in global markets.
With the world economy still subdued, further repair of banks’ balance sheets is necessary, which may require more capital for some lenders and closure for others, David Lipton, the fund’s first deputy managing director, said in a speech in Washington yesterday. He also called for unwinding of excessive public and private debt.
“If these medium-term challenges are not adequately addressed, the recent rally in global markets may prove unsustainable,” Lipton said, according to his prepared remarks. “And the still fragile confidence in banks and the wider financial system could turn into fear, which could trigger a renewed sense of crisis.”
The MSCI World Index (MXWO) of stocks has risen about 7 percent this year as equity markets in the U.S., Japan and Europe rallied.
Still, the Washington-based IMF earlier this year cut its global growth forecast for 2013. Recently it said it would lower its prediction for the U.S., where $85 billion in federal government spending cuts have started to take effect.
Speaking to members of the Chartered Financial Analyst Society of Washington, Lipton said the global financial system is not yet safe, even if it is in a better shape than five years ago.
