THE FINANCIAL sector faces potential losses of nearly $1,000 billion as a result of the credit crisis, the International Monetary Fund said yesterday, warning of further losses and writedowns on prime mortgages, commercial real estate, leveraged loans and consumer finance.
The IMF said total losses and writedowns would reach about $945 billion, based on market prices in mid-March. Banks would suffer slightly more than half the total losses, with the rest falling on insurance companies, pension funds, hedge funds and other investors.
The IMF believes that banks have already taken most of the writedowns needed on US subprime loans - with about $193 billion taken already and only about $80 billion to come. But it warned that as the US economy weakened, pain was spreading to other forms of lending.
"The deterioration in credit has moved up and across the credit spectrum," Jamie Caruana, head of monetary affairs and capital markets at the Fund said.
The estimate is set out in a gloomy Global Financial Stability Report, which challenges the more optimistic tone in the markets since the rescue of Bear Stearns by the Federal Reserve and JPMorgan Chase.
The report says "systemic risks have risen sharply" since October.
Mr Caruana, a former governor of the Bank of Spain, told reporters that the Bear rescue "helped to reduce the possibilityof a tail event in the financial system" - in other words, it made a truly catastrophic outcome less likely.
But he said "funding strains remain high and balance sheet pressures on financial institutions continue."
Mr Caruana said there had been a "collective failure to appreciate the extent of leverage in the financial system" and that balance sheet strains could limit banks' capacity to lend.
The report's publication comes days before finance ministers and central bank governors from the IMF's 185 members gather in Washington for spring meetings of the fund and World Bank. Group of Seven policy makers meet on April 11th.
The fund, which predicted a year ago that any ripple effects from a subprime mortgage crisis would be limited, blamed lax regulations and a lack of understanding about the risks in structured financial products for the crisis.
"Everybody has learned a lot," saod Mr Caruana, when asked how the fund underestimated the fallout.
"We have all to be a little bit humble on the analysis of the crisis, because it has been a very, very complex crisis."
The IMF estimate exceeds those by other economists, including analysts at UBS AG, who projected in February that financial firms may lose $600 billion.
While financial innovations have brought some benefits, "the events of the past eight months have also shown that there are costs," the IMF said.
At the same time, the fund urged governments against a rush to increase regulation, especially changes that "unduly stifle innovation or that could exacerbate the effects of the current credit squeeze".
Banks should improve disclosure and take writedowns "as soon as reasonable estimates of their size can be established," the fund said.
It also urged stronger supervision of capital adequacy, and said policy makers should prepare for further disruptions, the IMF said. - (FT/Bloomberg)
