The strength of the recovery in confidence and markets has had a very dramatic impact on the way we are now viewing possible losses for banks and other financial institutions.
In short no one cares how big the estimates are, it’s all yesterday’s news.
Eight months ago figures as we saw from the International Monetary Fund this week, would have sparked another rush of fear and loathing about the safety of the banks, which would have in turn, sent a tremor or three through share and credit markets.
And yet, the reaction to the news that the world’s banks, and especially those in the US, Europe and the UK have $US3.4 trillion further in losses on loans to account for, hardly raised a ripple.
And, a warning from the IMF that there was still a “significant” risk of another downward lurch in the global recession and that credit risks remained “elevated” even though financial conditions have improved significantly since spring, went through to the keeper without a backward glance from investors.
The attitude seems to be ‘it’s over’ and ‘let’s gets get on with things’.
In its twice-yearly Global Financial Stability Report, published on Wednesday, the Fund, estimated the ultimate losses in the financial system would total $US3,400 billion between 2007 and 2010, an improvement from the $US4,000 billion estimate it published in the April report.
It said these risks, alongside the weakened banks, were likely to depress the availability of new credit and damp the global economic recovery unless significant additional capital was raised to improve the health and lending capability of banking systems.
That $US600 billion improvement contains the roots for the apparently blasé approach to the news of the losses.
It’s an improvement flowing from growing confidence in financial markets which have helped push up assets prices, which in turn have cut mark-to-market losses on banks’ assets.
And, with the dissipation of the recession and the upturn generally in most economies, the need for cut has been further reduced, thereby further lowering loss estimates.
The IMF estimated that losses will total $US2,800 billion within the banking system by itself, but only $US1.3 trillion of those have been recognised.
The largest proportionate losses in banks are in the US and UK where losses on residential loans and commercial property, the loans with the highest default rates, account for a greater proportion of bank balance sheets.
"US domiciled banks have recognised about 60 per cent of anticipated write-downs, while euro area and UK domiciled banks have recognised about 40 per cent,” the report said
"For both banks and other financial institutions, the GFSR calculates that actual and potential write-downs from bad assets such as loans and securities have fallen by some $600 billion over the past six months—from about $4 trillion to $3.4 trillion, as a lessening in financial stress has narrowed spreads.
"Although write-down estimates are subject to considerable uncertainty, the analysis shows that the financial system is on the mend," the IMF wrote.
"Nevertheless, banks still confront substantial challenges.
"The GFSR (Global Financial Stability Report) estimates that commercial banks have already recognized $1.3 trillion through the first half of 2009, but face another $1.5 trillion of potential asset write-downs ahead.
"Hence, overall, banks have recognized slightly less than half of their expected losses. U.S. banks have recognized slightly more than have those in the United Kingdom and euro area."
The capital-raising by banks and recapitalisation by governments in various economies have improved the position of banks generally and helped them become more resilient in facing possible future losses.
The IMF also warned that heavy borrowing in some countries by governments (such as the US, UK, Japan and Germany) could increase the difficulties the private sector face in funding their own needs, especially in obtaining new capital by banks.
“In terms of regional vulnerability, the UK appears most susceptible to credit constraints … given its significant reliance on the banking channel and the projected sharp decline in domestic bank balance sheets, as well as substantial public financing needs,” the IMF said.
That is not the sort of thing the Brown Labour Government wanted to hear ahead of a national poll next year.
"Even though bank earnings are recovering, they are not expected to be big enough to offset fully the anticipated write-downs over the next 18 months," the IMF said.
"The insufficient earnings, combined with continuing deleveraging pressure, means banks will have to raise more capital.
"Additionally, banks must refinance a massive amount of maturing debt over the next two to three years. An unprecedented $1.5 trillion in bank borrowing is due to mature in the euro area, the United Kingdom, and the United States by 2012.
"The GFSR suggests that although their balance sheets have been stabilized, some of it because governments have injected capital, banks are not yet in a strong position to lend support to the economic recovery.
"With pressures on financial institutions’ balance sheets and a dormant private securitization market, the GFSR projects that a “financing gap” could arise—that is, projected credit capacity will be
