Toxic Assets Still a Major Threat to Economic Recovery

The global financial system, although unwillingly, is still in a way working against economic recovery as a result of  toxic assets/real estate loans held directly on the books of financial institutions and securities backed by loan portfolios.

The Guardian: Taxpayers around the world still face potentially large losses because governments have failed to act quickly enough to remove toxic assets from the balance sheets of key banks, the world’s leading central bankers warn today.

Despite months of co-ordinated action around the globe to stabilize the banking system, hidden perils still lurk in the world’s financial institutions according to the Basle-based Bank of International Settlements.

“Overall, governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks,” the BIS says in its annual report. “At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses.”
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As one of the few bodies consistently sounding the alarm about the build-up of risky financial assets and under-capitalised banks in the run-up to the credit crisis, the BIS’s assessment will carry weight with governments. It says: “The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy.”

It also expresses concern about the dilemma facing policymakers on when to start reining in the recovery. “Tightening too early could thwart the recovery, whereas tightening too late may result in inflationary pressures from the stimulus in place, or contribute to yet another cycle of increasing leverage and bubbling asset prices. Identifying when to tighten is difficult even at the best of times, but even more so at the current stage,” it says.

The presence of toxic assets creates not only uncertainty around the balance sheets of the banks holding them, but also heavily compromises their solvency, their ability to raise capital, and willingness to increase lending ; consequently impeding the immediate economic jumpstart the global economy desperately needs.