The huge losses inflicted on banks across the West by the credit crisis and past, lax lending are set to soar to $4 trillion (£2.75 trillion), the International Monetary Fund (IMF) said today.
Confirming massive loss estimates first revealed by The Times two weeks ago, the IMF says that the mounting toll on banks from the worst global recession since the Second World War is leading write-offs from loans to spiral.
In an analysis, the fund has sharply increased its estimate of losses on lending first made in the US for a second time, to $2.7 trillion. That is up from an initial forecast of slightly less than $1 trillion and an updated $2.2 trillion estimate released six months ago.
For the first time, the IMF has also produced estimates of likely losses inflicted on banks across key economies from lending originated in Europe and Japan.
It now puts likely total losses due to European lending at $1.19 trillion, and those for Japan at a comparatively modest $149 billion.
Two thirds of the total $4 trillion in write-offs are set to be made by banking groups, the IMF believes, with the rest affecting insurance groups and other types of financial institution.
Losses by British banks in 2009-10 alone are put at $200 billion, compared with $750 billion for European banks, and $550 billion for those in the US.
The vast scale of the losses and writedowns, released by the fund today in its twice-yearly Global Financial Stability Report, will massively increase the need for banks across the West to raise huge amounts in new capital, or be given capital injections by national governments.
To restore banks’ financial strength, measured by the amount of capital they have to back outstanding lending, to levels immediately before the present crisis erupted, the IMF says that banks need a total of $775 billion in fresh funding.
British banks would require $125 billion, US banks $275 billion, and eurozone institutions some $375 billion.
But the IMF warns that the capital needed could be very substantially larger.
To restore banks’ financial strength to the more secure levels of the mid-Nineties, it puts the capital required at almost $1.5 trillion — $250 billion for UK banks, $500 billion for US banks, and $725 billion for those in the eurozone.
Richard Hoblyn; It's quite clear that the efforts of Tim Geithner and other practitioners is having little impact on Main Street. It's also quite clear that Wall Street has made a classic Hospital Pass to the US (& UK) tax-payers. I said in January that the losses between 2009 and 2025 could spiral to £17tn in UK alone and I see no reason to change my estimate. Rather than looking at the way that derivative packages could be unwrapped (allowing for the actual core derivatives and mortgages etc to be traded out) the authorities have simply passed the problem to the tax-payer. What no-one seems to explain is what the UK tax-payer should do with these toxic assets now that the banks have offloaded them. I doubt very much whether UKFI has the skills, resources or imagination to do anything positive going forward. Regarding QE I'm wondering if Bank of England rather than buying gilts (the reverse auctions)should be bidding for the IMF's 400 tonne impending gold sale. This seems far more sensible to me as governments get more cajoled into re-examining a form of gold standard years down the line.
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