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IMF Weakness Could Hurt US Bank Stocks

Monday, 16 May 2011 | 11:26 AM ET

If the International Monetary Fund is substantially weakened by the arrest of its chief on sexual assault charges in New York Saturday, U.S. banks and their investors may suffer.

Although many Americans regard the IMF as a shadowy globalist organization that hands out billions of dollars in funds collected from U.S. taxpayers to foreign governments, U.S. banks are one of the key beneficiaries of IMF largesse. Increases in the budget of the IMF typically lead to higher bank returns—especially when those increases result in loans or guarantees to debtor nations.

A number of studies have shown the size of the U.S. government’s contribution to the IMF substantially affects returns on bank stocks.

When the U.S. contribution rises, bank stocks climb higher.

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“The main result is that the stock market expects virtually all additional resources provided to debtor countries to be used for debt service to commercial banks,” a 1991 study by economists Asli Demirguc-Kunt and Harry Huizinga found.

If this scandal seriously damages the reputation of the IMF, some U.S. lawmakers are likely to take the opportunity to cut IMF funding. The IMF has long been unpopular with right-leaning politicians, especially in the House of Representatives. It’s not hard to imagine Tea Party-affiliated congressmen calling for IMF cuts.

Such cuts would almost certainly negatively affect the returns on U.S. bank stocks, especially those with the biggest international exposure.

Since international exposure is heavily concentrated in the largest banks, investors in Citigroup , Bank of America , JP Morgan Chase and Wells Fargo should expect lower returns from any anti-IMF backlash.

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