Fitch says 80% of Banks’ Subprime Losses Written Down
Further subrime-related ratings bank downgrades are likely to be minimal as global banks have already written down more than 80% of their losses from subprime mortgage assets, Fitch Ratings says in a Special Report.
Fitch estimates total market losses from subprime mortgage assets at $400 billion, though estimates may be as high as $550 billion, depending on the method of calculation used.
Approximately 50% of these losses, $200-275 billion, are held by banks, with the remainder held by financial guarantors, insurance companies, asset managers and hedge funds.
As of May 2008, Fitch estimates disclosed losses by banks on subprime residential mortgage-backed securities (RMBS) or collateralised debt obligations referencing mortgage-backed securities (ABS-CDOs) to be $165bn, or 83% of the banks’ portion of the losses.
As a significant proportion of the losses have been disclosed, further ratings action arising from ABSâCDO and subprime RMBS exposures is likely to be minimal.
“Subprime mortgage-related losses for the total market vary considerably depending on the methodology used,” says Krishnan Ramadurai, Managing Director in Fitch’s Financial Institutions Group. “Given the problems associated with methods of calculation based on ABX and TABX indices, we believe that Fitch’s internal loss estimate of $400billion is a more appropriate reflection of losses though they are also sensitive to assumptions made on underlying loss rates.”
“To the extent that institutions have effectively hedged their exposures with financially sound counterparties, these loss figures may be over-estimated,” says Gerry Rawcliffe, Managing Director and Group Credit Officer for Fitch’s Financial Institutions Group. “Nevertheless, for those institutions that did not hedge a sufficient portion of their super-senior exposures, mark-to-market losses on these residual exposures have been so large that their capital ratios have come under acute stress.”
The subprime market originated as much as $1.4 trillion of loans in the last three years, Fitch estimates.
Detailed calculations and analysis are available in Subprime Mortgage-Related Losses - A Moving Target.
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