EU Banks Lost Even More than US Banks

IMF Boosts Global Loss Estimate to $4 Trillion: Roubini Estimates $1.8 Trillion Fall on U.S. Banks/Brokers, Up to $2 Trillion on European Banks, Rest on Asia

April 7: IMF to say that toxic debts racked up by banks and insurers around the world could spiral to $4 trillion. The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising losses on U.S. originated assets to $3.1 trillion (subject to further revision) in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia. Banks and insurers have so far owned up to $1.29 trillion in writedowns (about $800bn in U.S., $400bn in Europe, remainder in Asia). Roubing calculates that U.S. banks/brokers take a $1.8T writedown, EU banks $2T, and the remainder in Asia.

Loss Estimates for U.S. Banks/Brokers:


• IMF in January update raised total loan and security loss estimate on U.S. originated assets to $2.2 trillion, of which about half incurred abroad. Times reports that IMF plans to raise total loss estimate to $3.1T in April Stability Report, subject to further revision.
• Jan 20 Roubini/Parisi: Assuming a further 20% fall in house prices and unemployment peaking at 9-10%, we project total loan and securities losses amount to $3.6T, half of which accrue to the U.S. banking system, or $1.8T (of which $1.1 T in loan losses/ $600-700bn in securities writedowns).
• Capitalization of FDIC banks is $1.4T, that of investment banks as of Q3 $110bn. If projected loan and securities losses materialize, the U.S. banking system is close to insolvency despite TARP 1 of $230bn and private capital of $200bn.
• Outstanding loan are $12.4T. Of these, Roubini estimates $1.6T to turn bad. Of these, U.S banks and brokers are assumed to carry $1.1T
• Mark-to-market prices as of December imply around $2T in writedowns on $10.8T U.S. originated securities outstanding. Flow of funds data show that 40% of U.S. originated securities are held abroad. U.S. banks’ share of writedowns is about 30-35%, or $600-700bn for U.S. banks/brokers according to weights in IMF GFSR October 2008, table 1.1
• Chris Whalen (IRA): The bad news is that estimates that put aggregate loan charge-offs for all US banks over the next 12-18 months above $1 trillion are probably in the right neighborhood. The entire banking industry only has $1.5 trillion in capital, so new equity must obviously be provided by Washington and/or private investors.
• Jan 25 Goldman (via Zero Hedge): Total loan losses will reach $2 trillion of which $1 trillion are carried by the U.S. banking system (50% mortgage losses and 50% other loan losses). Banks need a minimum of $300bn additional capital but most likely more.
• Roubini: In order to restore healthy credit conditions, the banking system needs about $1-1.5T in public or private capital. This calls for a comprehensive solution along the lines of a ‘bad bank’ or RTC.

Loss Estimates For European Banks:

Fed Board: Flow of funds data show that 40% of U.S. originated securitizations are held abroad–> about $4.4T out of $10.8T securitizations held abroad, assume $4 T in Europe. Average writedown rate on securitization is 17% as calculated by Roubini, so about $680bn writedowns apply for Europe.

• Goldman Sachs: Total gross loan losses among European banks estimated at EUR 900bn, or $1.1 trillion>. This figure includes EUR310bn in losses falling on foreign registered banks and EUR77 registered in CEE ($400bn/$100bn respectively). (Note: report says that given that EU banks were slow in writing securities up they are justified in writing securities down slowly in the downturn as well–> focus on loans only.)
• The IMF puts expected losses on European/Asian loans at $900bn, rather than $1.1T estimated above.
• Danske:  European banks have $1.3T in claims on Central and Eastern European countries. Assuming that 20% of these loans turn bad, EU banks incur about $270bn in CEE-related losses, of which 70bn are already accounted for in Goldman loan loss estimate above.

–> Adding all up, expected losses among European banks amount to about $650bn exposure to U.S. securities +$1100 domestic&foreign loan losses+200 CEE=$1.95 Trillion

>–>Compare with Roubini’s expected losses amoung U.S. banks and brokers of $1.8Trillion.

–> Asia is expected to incur the remaining $200bn in writedowns for the total $4T expected by the IMF.

Tags: banks, eu, losses, toxic assets, us

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