by Caitlin Kenney

The staff of the International Monetary Fund says the G-20 response to the global banking crisis has so far been lacking. In a note released today, the IMF says bank restructuring measures have not gone far enough because they have "responded to market pressures rather than being based on a full diagnosis of the underlying soundness of institutions and estimating losses."

Even on a national basis, resolution strategies for the banking problems have taken place on a case-by-case basis, rather than as part of an overall assessment of the distress in the financial system. Capital injections were often not accompanied by an assessment of bank viability or by restructuring plans. Moreover, the injection of preferred shares in distressed institutions, while giving the authorities some upside benefit should the institutions recover, did not give governments a way to control or influence the bank's use of public money.

 

The U.S. approach to dealing with toxic assets is also specifically highlighted as a cause for concern:

Asset management policies are only slowing being put in place. Institutional arrangements for dealing with bad assets are only just emerging (e.g., the U.S. public-private investment fund and the U.K. asset purchase scheme), and difficult operational issues related to the valuation and disposal of these assets still need to be addressed.

The IMF is forecasting that the global economy will shrink by nearly 1 percent this year and that the U.S. economy will decline by 2.6 percent.