IMF Says Bad Debt Writedowns Could Reach $4 Trillion
The International Monetary Fund’s latest Global Financial Stability Report (GFSR) makes for some depressing reading. The IMF now believes writedowns of bad financial assets could reach $4 trillion worldwide, with two thirds of this incurred by banks. It presents a convincing case for more vigorous and rigorous approach to the problem:
“Without a thorough cleansing of banks’ balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks’ problems will continue to exert downward pressure on economic activity. Though subject to a number of assumptions, our best estimate of writedowns on U.S.-originated assets to be suffered by all holders since the outbreak of the crisis until 2010 has increased from $2.2 trillion in the January 2009 Global Financial Stability Report (GFSR) Update to $2.7 trillion, largely as a result of the worsening base-case scenario for economic growth.”
In this GFSR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $4 trillion, about two-thirds of which would be incurred by banks.
The IMF’s prescription:
- A more active role of supervisors in determining the viability of institutions and appropriate corrective actions, including identifying capital needs based on writedowns expected during the next two years.
- Full and transparent disclosure of the impairment of banks’ balance sheets, vetted by supervisors based on a consistent set of criteria.
- Clarity by supervisors regarding the type of capital required—either in terms of the tangible common equity or Tier 1—and the time periods allotted to reach new required capital ratios.
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