Further write downs to hit banks

The European Central Bank (ECB) has warned there could be a further US$283 billion of write-downs by the end of next year.

To the end of May this year, global banks have written down US$1,042 billion, the bank said in its latest Financial Stability Report.

However, at the end of May, global banks had only raised US$976 billion of capital.

The ECB said many of the downside risks it identified in the December 2008 report have now crystallised.

“In particular, the further significant deterioration of global macroeconomic conditions, as well as sizeable downward revisions to growth forecasts and expectations,” the report said.

“These have added to the stresses on global and euro area financial systems.

“The contraction of economic activity and the diminished growth prospects have resulted in a further erosion of the market values of a broad range of assets.”

The ECB noted euro zone banks were making efforts to reduce debts but were being hampered by illiquid assets in a stressed marketplace.

“The adjustment of bank balance sheets has entailed adverse feedback on the market pricing of assets,” the report said.

“Hard-to-value assets have remained on bank balance sheets and the marked deterioration in the economic outlook has created concerns about the potential for sizeable loan losses. Reflecting this, uncertainty prevails about the shock-absorption capacity of the euro area banking system.”

The ECB believes there is a danger the downturn could be more prolonged and deeper than expected.

It sees the risks as further erosion of capital bases in banks, significant balance sheet strain and more widespread asset price declines.

The ECB warns euro zone banks will have to work hard to avoid the financial crisis deepening in Europe.

“There is no room for complacency because the risks for financial stability remain high, especially since the credit cycle has not yet reached a trough,” the report said.

“Banks will, therefore, need to be especially careful in ensuring they have adequate capital and liquidity buffers to cushion the risks that lie ahead, while providing an adequate flow of credit to the economy.”