IMF PREDICTS $200bn MORE UK BANK LOSSES

UK’s banks have written off only a third of the losses they ultimately face, according to the IMF yesterday. It says bank lenders need at least $125bn in additional capital to rebuild their balance sheets, by which it means their capital reserves. A more comprehensive view of "rebuilding 'balance sheets'" will, among other restructuring, require five times as much as the $125bn spoken of in new (replacement or roll-over) wholesale funding, but that aspect, central to the 'credit crunch' seems to be below the IMF radar. It is of course being supplied by the Bank of England's Asset Protection Scheme, 'son of SLS'(working with HM Treasury's DMO and UKFI Limited).
UK banks have already written off $110bn on complex debt securities and other assets, but the IMF estimates they face another $200bn in losses over the next two years as loans to companies and consumers go sour. I wonder if the IMF is looking only at UK banks' domestic assets or their total global assets. In either case £100bn a year for 2 years is scarecely a concern given the asset losses and share losses and the scale of Bank of England and HM Treasury long term support already of over £800bn in asset swaps alone, plus about £70bn capital and well over £1tn capacity in liquidity window support.
In addition, the IMF calculates to return them to the stronger capital ratios common in the mid-1990s, that capital infusion would have to be doubled to $250bn. But, as other analysts point out that the IMF’s capital calculations are based on a crude ratio of tangible common equity to total assets. This measure ignores preference shares and other hybrid instruments, and makes no allowance for the relative riskiness of different assets. The IMF's calculation are in no way superior to what journalists can find out easily for themselves and certainly not adding anything to the much fuller data available from the Bank of England Stability Reviews.
As in the US with the FDIC/Geithner stress-tests of the top 19 banks, there are stress-tests of UK banks’ balance sheets demanded and informed by the FSA. It wants to know the impacts that can be forecast on Tier One 'core capital'. On this question, the FSA recently concluded Barclays does not need further capital. Analysts also question the IMF’s prediction that banks’ profits, before bad debts, will fall by between a third and a half in the coming 2 years, when in recent weeks, big banks in Europe and the United States have all reported better-than-expected results, helped by improved margins on trading and lending in traditional banking. This shows that banks have the capacity to internally generate sufficient capital, given sufficient time to do, to absorb much, perhaps most, of rising loan losses. Assuming that government measures have staunched credit crunch losses by replenishing capital reserves and byproviding funding gap finance when the private sector won't, then the remaining losses are more normel recession losses that the banks should be quite capable in various ways of absorbing. These ways include cost cuts, selling off non-core businesses, and re-focusing on net interest income from traditional banking. What they must not do is accelerate foreclosures and deleveraging so that they add to the depth and length of recession. Governments are aware of this risk and have the whip hand to insist the banks maintain lending levels. UKFI Ltd. now 'owns' almost $4tn of UK commercial banking assets. Furthermore technically the banks majority owned by the government are now technically outside regulatory rules on capital reserves and being guaranteed by government are incapable of being technically insolvent.
This is an aspect the IMF does not like, despite advising that governments must now accept nationalisation of banks if necessary. It says that capital for the world's banks need should ideally come from private investors, but given their reluctance, governments should be prepared to inject more common equity into institutions and even nationalise them where necessary. The word 'ideally' is questionable in the sphere of financing the banks' funding gaps. If banks are going to break the bounds of the transmission mnechanism as conventionally understood, they are heading for a credit boom economy. Therefore, it may be only right that the funding gap to facilitate credit-led growth should generate fee and interest rate profits for taxpayers and have some degree of government economic policy control.