The International Monetary Fund lowered its estimate for global write-downs for banks and other financial institutions to roughly 3.4 trillion US dollars but warned that loan losses could rise in the face of stubbornly high unemployment and associated delinquencies.
The report said US institutions were about 60% through their needed write-downs, while their Euro area and British counterparts had recognized only 40% of losses.
In April the IMF estimated in its Global Financial Stability Report that global bank losses could reach 4 trillion but it said it cut this figure by 600 billion USD to reflect rising securities values and new ways of calculating losses.
This improvement is welcome but there are still significant challenges ahead, particularly for banks, said Jose Vinals, head of the IMF monetary and capital markets division. He said global financial conditions had improved significantly although there are lingering concerns over bank capital.
We've come from being on the brink of a financial meltdown to a situation where stability has returned to the financial system he said, The next challenge is how do we make this financial system that we have now support the recovery going forward?
The report said that while banks have enough capital to survive, their earnings are not expected to fully offset write-downs expected over the next 18 months.
Vinals said banks were starting to make money again after severe losses in the face of the global financial turmoil but urged them to save their profits and not to pay dividends.
There is a temptation when you go back into profits to have the equity buybacks and the dividend payouts, he told a news conference in Istanbul before the start of the semi-annual World Bank and IMF meetings. Capital conservation is something that is very important at this stage, said Vinals.
He said while bank balance sheets had been stabilized with the help of government support, they would need more capital to meet credit demand as economies recovered.
This is not a question of rescuing banks from the brink of collapse, it’s a question of providing banks with enough muscle to support the losses that they are still going to have coming and to provide credit to support the recovery, he added.
The IMF said while private-sector credit growth has contracted in big economies, overall borrowing needs have not slowed as quickly because of burgeoning government deficits. The likely result is constrained credit availability, it said, adding that continued support by central banks may be required to alleviate this.
Using new methodology to calculate the write-downs, the IMF said bank losses on loans and securities holdings amounted to 1.3 trillion USD through the first half of 2009 but emphasized that about 1.5 trillion USD in write-downs still needed to be recognized, especially in private banks.