The International Monetary Fund on Wednesday lowered its estimate for global write-downs for banks and other financial institutions to roughly $3.4 trillion but warned that loan losses could rise in the face of stubbornly high unemployment and associated delinquencies.
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 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's monetary and capital markets division.
In an interview with Reuters, Vinals 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, its 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 Fund 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 through the first half of 2009 but emphasized that about $1.5 trillion in write-downs still needed to be recognized, especially in private banks.
The report said U.S. institutions were about 60 percent through their needed write-downs, while their euro area and British counterparts had recognized only 40 percent of losses.
It's not that banks don't want to recognize (the losses), it's that the loan cycle takes its time and therefore these are loans that are going to imply losses for banks as the cycle advances, Vinals told Reuters.
Even if the economic situation (improves), unemployment rates are going to ... stay high for a while, and it is going to imply higher non-performing loans in bank losses.
DEAL WITH IT
The IMF urged authorities to deal with troubled assets still on banks' books, adding that reassuring stress test results and signs of economic stabilization have eased pressure to deal with the toxic debt.
Authorities, banks and investors need to persevere with these programmes, the IMF said, adding that in countries where banks were undercapitalized, such toxic assets should be ringfenced to reassure markets about future losses.
Only when this source of uncertainty has been substantially reduced can banks fully participate in providing credit for recovery, the IMF said.
(Additional reporting by Daren Butler; editing by Jan Dahinten and Stephen Nisbet)