Banks have improved the health of their balance sheets by raising capital, but in a report on the state of the UK the IMF warns the share of non-performing assets across some major banks remains at high levels.
To help ensure that future asset price bubbles do not threaten the economy, the government should consider granting the Bank of England’s Financial Policy Committee, which is designed to monitor macroeconomic stability, powers to set limits on loan-to-value and loan-to-income ratios.
The IMF says greater coordination between the two new agencies new agencies tasked with prudential supervision - the FPC and the Prudential Regulation Authority - is needed. It adds that the government must ensure the PRA has operational independence and adequate resources.
In its annual check of Europe’s third largest economy, the IMF also states the economy needs to rebalance and make the transition to a high-investment and more export-oriented economy.
According to the report, banks will need to focus on building capital while not compromising the availability of credit, by some combination of new equity issuance, dividend reductions, remuneration constraints, and balance sheet restructuring.
Because they account for nearly two fifths of total lending, a strategy to deal with Royal Bank of Scotland and Lloyds Banking Group, the two troubled banks the government took large stakes in at the height of the financial crisis in 2008 and 2009, is said to be particularly important.
The IMF says any strategy should return the banks to private hands in a way that maximizes the value for taxpayers, strengthens confidence and competition in the financial sector and minimizes spillovers.
After five years of relatively weak growth, investment is low and youth unemployment is high, and the IMF’s report reveal it is concerned about the risk of permanent damage to long-term growth.
The government has shown flexibility in its fiscal program to mitigate damage to growth, but planned fiscal tightening this year will be a drag on the economy, it says.
With unemployment high and interest rates low, the IMF argues the government should take the opportunity to bring forward “high value” spending that has big long-term payoffs.
Plans to reduce government debt and deficits should also be modified, according to the IMF.
David Lipton, deputy managing director of the IMF, said: “Recent data suggest some improvement in economic and financial conditions, which is encouraging.
“But the UK has a long way to go. Investment has been persistently weak and unemployment, especially among young people, is high.”