The IMF issued its Global Financial System report and one of the most critical points of its analysis is that banks face another $1.5 trillion in writedowns. That is on top of the $1.3 trillion that they have already taken. “We are on the road to recovery, but this does not mean that risks have disappeared,” said José Viňals, Director of the IMF’s Monetary and Capital Markets Department.
At the core of the IMF data is the fact that banks will have to raise more capital, perhaps hundreds of billions of dollars. That will be bad news for current equity holders in American financial firms who have seen the value of bank stocks rise two-fold or three-fold from March lows. There may well be another large round of losses ahead., which could cause dilution and push financial firm shares down again.
The other conclusion that the IMF report is likely to draw is the government bailout programs may be at risk. Programs like the TARP may have to be reinstituted, or, the assets that the Treasury and Fed already hold may be substantially devalued.
US bank investors and many bank analysts have looked at American financial firms as well on the way to recovery. But, there has been a vocal minority of experts who say that the recovery in bank balance sheets is based on the write-up of assets which still have dubious values and on the improving stock market which helps the equity positions that many banks hold. The IMF is saying that those improvements may be temporary if they were ever real at all.
The global recovery, and especially the recovery in the US, has been hampered by an ongoing lack of access to credit. Another round of bank losses could make that problem worse and, in the process, tighten the credit markets again. That could break the back of an economy that is improving in very small increments.
Douglas A. McIntyre
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