IMF: European regulators are making the downturn worse

In many European countries, banking regulators have made the crisis more severe by failing to intervene in procyclical lending behaviour, the International Monetary Fund warned today.

In its regional economic outlook for Europe, released today, the IMF said that widespread use of financial assets as collateral had amplified the effects of the economic cycle.

"The rapid growth of asset prices, particularly stocks and real estate prices, during booms raises the value of collateral, thus stimulating credit growth... However, this behaviour also increases the vulnerability of the financial system during the subsequent downswing, when it becomes clear that the loans did not have adequate backing," the Fund said, adding that "risk assessment and traditional regulatory tools" could also act to exaggerate the normal business cycle.

It added that it was up to national regulators to counteract this, by compelling banks to increase their reserves during booms and draw on them during downturns - as is already required in Spain.

The economic slowdown in Europe, including a short recession in the more advanced economies, would keep inflation below targets, but governments would have to concentrate on ensuring financial stability, the Fund recommended.

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