The Bankwatch

Tracking the consumer evolution of financial services

Loan losses could reach $4 trillion | requires additional bank capitalisation of up to $725 bn

The IMF has released its semi annual Global Stability review, that few paid attention to before, but now has much increased visibility.  In particular this week, with Geithner about to release the results of the bank stress tests, this pre-empts the Fed leaving much little room to manoeuvre in understating the outcomes.

Bottom line – the IMF sees $ 2.7 Tn in US based originated write offs and $ 4 Tn in total write offs, with banks absorbing 2/3 of that.

IMF Global Stability Review – April 2009

Without a thorough cleansing of banks’ balance sheets of impaired  assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks’ problems will continue to exert downward pressure on economic activity.

Though subject to a number of assumptions, our best estimate of writedowns on U.S.-originated assets to be suffered by all holders since the outbreak of the crisis until 2010 has increased from $2.2 trillion in the January 2009 Global Financial Stability Report (GFSR) Update to $2.7 trillion, largely as a result of the worsening base-case scenario for economic growth.

In this GFSR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $4 trillion, about two-thirds of which would be incurred by banks.

The specific potential implication for banks is outlined at a high level.  They note two approaches to quantify the issue;  pre crisis capitalisation, and a more conservative return to mid 90’s capitalisation levels.

Pre Crisis Mid 90’s
US Banks $ 275 Bn $ 500 Bn
Euro Banks $ 375 Bn $ 725 Bn
UK Banks (included in euro banks above) $ 125 Bn $ 250 Bn

While large, the amounts are not as big as the losses make us think, so this could be a manageable exercise.  The issue will be to what degree are government involved, and what additional government ownership of banks is necessary to make this happen.  The reason we care about government ownership is the related impact on banks’ ability to improve service and innovate.

Written by Colin Henderson

April 21, 2009 at 10:05

Posted in economy

One Response

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  1. I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.


    May 16, 2009 at 10:02

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