Major Global Banks Need $675 billion in Capital
Major global banks will need an estimated $675 billion in capital over the next several years to keep private sector credit growing even modestly, while strengthening bank capital ratios, according to the International Monetary Fund. At the same time, the IMF advocates “a greater degree of judgment” in the application of mark-to-market rules to avoid “fire sale” prices of impaired securities.
With the turning point in the default cycle yet to be reached, the GFSR estimates that declared losses on U.S.-originated loans and securitized assets are likely to amount to about $1.4 trillion, compared to the April 2008 GFSR estimate of $945 billion.
In its latest Global Financial Stability Report released today, the IMF says several measures could be considered to bolster bank’s capital positions:
- With many financial institutions finding it much more difficult to raise private capital at the present time, the authorities may need to inject capital into viable institutions. While there are many ways to accomplish this, it is preferable that the scheme provide some upside for the taxpayer,coupled with incentives for existing and new private shareholders to provide new capital.
- Though politically difficult, orderly resolution of nonviable banks would demonstrate a commitment to a competitive and well-capitalized banking system.
- As private sector balance sheets shed assets to reduce leverage the use of public sector balance sheets can help prevent “fire-sale” liquidations that threaten to reduce bank capital.
- Countries whose banks have large exposures to securitize or problem assets could consider mechanisms for the government to purchase or provide long-term funding for such assets. This should create greater certainty about balance sheet health. Setting up an asset management company provides a framework of legal clarity and accountability for the process.
- Allowing for a greater degree of judgment in the application of mark-to-market rules may avoid accelerating capital needs by reducing the pressure to value securities at low “fire-sale” prices. Such judgment would require close supervision and should be accompanied by appropriate disclosure
in order to avoid undermining confidence in balance sheets of existing institutions.
Since the April 2008 GFSR, monetary and financial conditions have tightened further, risk appetite has continued to contract, and global macroeconomic, credit, market and liquidity, and emerging market risks have increased, the IMF said.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.