Tuesday, April 21, 2009

Estimates of banks' writedowns get (much) bigger

The IMF released today their semiannual Global Financial Stability Report. In the report they estimate the potential loses of financial institutions (writedowns) to be close to $4.1 trillion. Out of those, $2.7 correspond to assets originated in the US, the rest to assets originated in Japan or Europe (of course, the assets could be anywhere in the world). 

Who will incur these loses is a much more difficult question to answer because you need to know who is holding these assets. Nouriel Roubini has estimated that US financial institutions are exposed to about $1.8 trillion losses out of these figures (this calculation takes into account the fact that banks have already written down about $1 trillion of the estimated $4 trillion). How large is this number? Well, if you consider that the total capital of US banks is about $1.4 trillion, it implies that without additional capital, US banks are insolvent.

All these estimates rely on any assumptions about the evolution of the economy, valuation of some assets, so there is a high degree of uncertainty and there is room for things to get better (but also worse...). No doubt that the coming release of results of the stress tests that have been conducted in US financial institutions might bring some interesting surprises and a debate on how to interpret the tests and how to act on them. 

Antonio Fatás
on April 21, 2009 |   Edit