24 April 2009

Western banking system cannot be rebooted, period

Without destroying currencies with massive public bailouts via QE. The bailouts to date are about a tenth of the eventual requirement.
Can you spell "hosed"?

The major risk sits with Western lenders. The key numbers are in Exhibit 3. To end-2008, Western banks had written down $844 billion, and raised equity capital of $792 billion. Looking ahead, the IMF expects write-downs through 2009-10 of $1,625 billion, versus retained earnings of $1,175 billion - implying a drain on equity of $450 billion. Doing no more than replenishing those losses would leave the banks dangerously leveraged. The banks require an additional $875 billion of equity to reduce leverage (tangible assets/tangible common equity) to 25 times. To reduce leverage to 17 times, requires $1,700 billion in new equity.

Put another way, to reduce leverage to 25 times implies that banks are half-way through the equity raising process; they are only one-third through if the target is 17 times (which was the average leverage multiple of US banks in the mid-1990s).

To be blunt, it's not clear where that equity capital will come from. Private investors have already been badly burnt injecting capital into major lenders. Further public injections would run up against political hostility to bailing out 'banksters'.

Banks need more than just equity capital. The shift to wholesale funding means that banks require the ongoing support of capital markets. That support is now largely gone. As the IMF notes, private bank funding markets are mostly closed, leaving banks to rely on central banks and the government (for guaranteed unsecuritized funding). There is a wall of long-term finance that is set to mature and will need to be refinanced. The IMF has estimated the funding gap facing the 22 largest global banks if private wholesale funding is unavailable. The gap rises from $20.7 trillion in late 2009 to $25.6 trillion in late 2011, despite bank assets remaining roughly constant on average over the period and customer deposits growing in parallel with nominal GDP (Exhibit 4). So far, existing public sector assistance to banks amounts to direct liquidity provision of $2 trillion; committed asset purchases of $2.5 trillion, and guarantees of $4.5 trillion.

No comments: