By BOB DAVIS and DAVID ENRICH
WASHINGTON -- U.S. and European banks need to raise $875 billion in equity by next year to recapitalize banks to levels similar to the years before the current crisis -- and twice that amount to match the levels of the mid-1990s, the International Monetary Fund estimated.
The steep funding requirements reflect a financial crisis that continues to deepen with the global recession, the IMF said. The banking sector's woes have spread from the housing sector to commercial real-estate loans and emerging-market debt. Overall, the IMF estimates the U.S., European and Japanese financial sectors face losses of about $4.1 trillion between 2007 and 2010. Of that, banks are confronting $2.5 trillion in losses, insurers $300 billion and other financial institutions $1.3 trillion.
The banking sector has already written down $1 trillion of those losses, said the IMF; it didn't estimate how much other financial firms have written down thus far.
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IMF report and discussion"Without a thorough cleansing of banks' balance sheets of impaired assets ... risks remain that banks' problems will continue to exert downward pressure on economic activity," said the Global Financial Stability Report, the IMF's twice-yearly review of the financial sector.
While problems in the U.S. mortgage sector are generally blamed for the global financial crisis, the IMF report shows that other regions played a big role too. About $2.7 trillion of the losses from 2007 to 2010 were attributable to the U.S. market, the IMF reported, while about $1.2 trillion came from bad loans and securities losses in Europe.
U.S. banks have written down roughly half their anticipated $1.06 trillion in estimated losses from 2007 to 2010, the IMF said, while euro-zone banks have written down just 17% of their $900 billion in losses. British banks have written down about one-third of their $310 billion in anticipated losses.
In certain areas, the IMF has a bleaker outlook than some prominent Wall Street bears.
The fund projects that 7.9% of U.S. loans will have gone bad by next year.
In a recent research report, Calyon Securities analyst Mike Mayo predicted that losses will crest at 3.5% of loans, a level that he said would slightly eclipse the peak rate during the Great Depression. Mr. Mayo estimated that U.S. banks are only about one-third of the way through accounting for losses on credit cards and other nonmortgage consumer loans, while losses on business loans "seem in the early stages."
Despite the grim message, some IMF officials sounded a somewhat optimistic note. They said improvements in some markets in the past month point to the possibility that writedowns could come in below the report's projections.
"Circumstances in some of the markets were worse than they are now" when the $4.1 trillion loss estimate was calculated at the end of March, said Jan Brockmeijer, deputy director of the monetary and capital-markets department.
The market improvements have been "across the board," but not significant enough to alter the overall outlook, said Mr. Brockmeijer. Some of the biggest improvement has come from emerging-market spreads, which he said is in part due to the recent announcement of plans to quadruple the IMF's resources. On Tuesday, Colombia became the third country, after Mexico and Poland, to seek new IMF credit lines to bolster their economies.
—Tom Barkley contributed to this article.
