The deteriorating global economy means financial institutions now face total losses of $4,100bn on loans and other assets, the International Monetary Fund said on Tuesday, urging governments to take "bolder steps" to shore up institutions - including nationalising them where necessary.
The IMF said in its Global Financial Stability Report that many loans sitting on institutions' balance sheets were eroding in value, not just the toxic sub-prime securities which first triggered the crisis.
The IMF estimated that total writedowns on US assets would reach $2,700bn, up from the $2,100bn estimate it made in January and almost double what it forecast in October last year. Including loans originated in Japan and Europe, the writedowns would hit $4,100bn, it added.
Banks would bear about two-thirds of the losses, it said, with insurance companies, pension funds, hedge funds and others taking the rest.
Efforts to cleanse these bad assets from balance sheets and replenish viable institutions with capital had so far been "piecemeal and reactive", the IMF said, calling for more decisive government action.
"The current inability to attract private money suggests the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares even if it means taking majority, or even complete, control of institutions," it said.
The report is likely further to unnerve investors, even though the writedown estimates are lower than those of some private economists. On Monday traders were so alarmed by news of rising delinquencies on consumer and business loans at Bank of America that they triggered a stock market sell-off.
US banks have so far taken about half of the writedowns they face, while European banks - particularly vulnerable because of their exposure to emerging European markets - have only taken one-fifth. But if banks took all the writedowns they face immediately, the IMF calculates it would wipe out their common equity altogether.
That highlights the urgent need to inject more capital into many banks and other institutions. To restore their balance sheets to the state they were in before the crisis - defined by the IMF as a tangible common equity to tangible asset ratio of 4 per cent - US banks need $275bn in capital injections, euro area banks need $375bn and UK banks $125bn.
But the IMF expressed concern that taxpayers were becoming weary of supporting the financial sector. "There is a real risk that governments will be reluctant to allocate enough resources to solve the problem," the report said.
One possible step would be for governments to convert their preferred shares in banks into common equity, the IMF suggested. This is something that the US government is considering, a senior official has told the Financial Times, though some have criticised such measures as "nationalisation by the back door."
Even if governments do take bold action to shore up the system, the credit crisis will be "deep and long-lasting", the IMF warned. It said that deleveraging and economic contraction would cause credit growth in the US, the UK and the eurozone to contract and even turn negative in the near future, and only recover after a number of years.
The IMF was also gloomy about the prospects for emerging markets as foreign investors and banks withdraw funds. It estimated the refinancing needs of emerging markets are around $1,800bn, while net private capital will flow out of such economies this year.
Reshaping global financial regulation was another major topic in the IMF report. It suggested creating two tiers of regulatory oversight: one to gather information, and a smaller one for systemically important institutions with "intensified" regulation.
It also mooted the idea of levying an extra capital surcharge as a way to deter companies from becoming "too-connected-to-fail" in the first place.
Copyright: The Financial Times Limited 2009