1 October 2009

Plenty More Bank Losses Expected Globally Additional $1.5 Trillion in Write-Downs Forecast by End of 2010 Despite Rising Securities Prices

Hat tip to C H Powell, who added....here you go, Kevin; everything I've been braying about for the last eight months:we're about 45% done (writedowns)....

ISTANBUL -- Rising global securities prices reduced the International Monetary Fund's estimate of bank losses, but banks around the world -- especially in Europe -- still are likely to face additional write-downs of $1.5 trillion by the end of next year, the IMF said.

Overall, the IMF calculates that the global financial crisis will produce $3.4 trillion in losses for financial institutions, between 2007 and 2010, a chunk of which already has been recognized. That estimate is $600 billion less than the IMF forecast in April, largely reflecting an increase in the prices of securities held by financial institutions since then.

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The IMF projected total losses in the banking sector specifically will reach $2.8 trillion. That is the same as in April, but the figures aren't directly comparable because the IMF reworked its methodology, in part to track potential losses in European banks. Of that amount, the IMF said, banks globally have written down $1.3 trillion and have additional potential losses of $1.5 trillion facing them.

As in past estimates, the IMF said that banks in the U.S. are further ahead in dealing with potential losses than those in Europe. Banks in the U.S. have recognized about 60% of anticipated write-downs, the IMF calculated. Banks in the Britain and continental Europe have recognized only about 40% of their potential losses.

The IMF said that U.S. banks' portfolios rely more on securities, and thus have benefited from the recent gains in stock markets. Banks in Europe, however, are more dependent on loans to Eastern Europe and other beleaguered markets, whose economies remain vulnerable.

"Financial markets have rebounded, emerging-market risks have eased, banks have raised capital and wholesale funding markets have reopened," the IMF said. "Even so, credit channels are still impaired and the economic recovery is likely to be slow."
Full IMF Report

The IMF urged governments to continue pressing financial institutions to dispose of toxic assets and build capital cushions.

The fund estimated that bank losses in the U.S. and Europe over the coming year or so were likely to outpace the banks' retained earnings over that time, reducing their equity. By several measures of capital, banks in the U.S. and the U.K. were in better shape than their counterparts in continental Europe, the IMF found.

Private-sector demand for credit is likely to remain "anemic," the IMF said. But vastly increased public borrowing could put upward pressure on interest rates and undermine what is likely to be a tepid recovery.

Historical evidence suggests that a 1 percentage point increase in the fiscal deficit, if long lasting, helps produce an increase in long-term interest rates of between 0.1 and 0.6 percentage point. Picking the middle of that range, the IMF said increase in the budget deficits by sums equal to between 5 and 6 percentage points of gross domestic product -- well within the range of possibility in the U.S. and Europe -- could boost long-term interest rates by 1.5 to 2.0 percentage points. That, the IMF warned, would have "very adverse growth consequences."

The IMF urged global governments to start planning to reduce the extraordinary fiscal and monetary stimulus that has been used to fight the global recession, though it didn't urge that such a withdrawal begin yet.

The fund also counseled nations to adopt policies to reduce the threats posed by financial institutions deemed "too big to fail" -- meaning the government needs to bail them out or face a systemic meltdown. Among the possible policies the IMF suggested: requiring such institutions to carry additional capital and liquidity requirements to encourage them to reduce their size and complexity. Risk-based charges to "prefinance a bailout fund" are another possibility, the IMF said.

Write to Bob Davis at bob.davis@wsj.com

1 comment:

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