IMF: Smaller U.S. banks need a bigger safety net

WASHINGTON — The U.S. financial system remains under stress, with small and midsize banks potentially needing to raise more capital, according to a new report from the International Monetary Fund that shows the continuing strains facing the U.S. economy.

The IMF found that U.S. banks need to raise about $45 billion in new capital — most of it by regional and small banks — to ride out an adverse economic scenario that amounts to a dip back into recession while maintaining the fund's recommended capital ratio. The banking system will be in relatively solid shape if the U.S. economy continues to grow steadily, which the IMF thinks is likely.

"There remain important risks to the U.S. financial system and its ability to support the economic recovery," the report said, noting that "bank balance sheets remain fragile and capital buffers may still be inadequate in the face of further increases in nonperforming loans."

The report is the first-ever formal IMF assessment of the U.S. financial sector. While they praise much of the government response to the financial crisis and newly passed regulatory legislation, IMF officials argue that in some areas the government has not gone far enough in correcting frailties that contributed to the crisis.

In particular, even after enactment of the Dodd-Frank financial overhaul, which President Obama signed into law last week, there are too many different U.S. financial regulators with varying and sometimes overlapping roles, the IMF found.

"The complexity of the U.S. supervisory system and the diffusion of powers across agencies undermined its efficiency, effectiveness, transparency, and accountability," the IMF found. "Reform legislation seeks to address these issues but bolder action would have been preferable."

Also, the IMF noted that there has yet to be any resolution of the long-term role that Fannie Mae and Freddie Mac, the government-controlled housing finance firms, will play. The IMF endorsed a public-private model in which the firms' mortgage securities are privatized and their social objectives of supporting home ownership are undertaken by an explicitly public entity.

The Obama administration is just beginning to craft proposals for overhauling Fannie and Freddie, and many Republicans criticized the Dodd-Frank bill for not dealing with the firms.