US and European Banks Need $875 Billion In Equity, IMF Says

U.S. and European banks need to raise $875 billion in equity
by next year to recapitalize banks to a level similar to the pre-crisis
years -- and twice that amount to match the level of the mid-1990s, the
International Monetary Fund estimated.

The steep funding requirements reflect a financial crisis that the IMF said
continues to deepen along with the global recession. The banking sector's
woes have spread from the housing sector to commercial real estate loans
and emerging-market debt. Overall, the IMF estimates that the U.S.,
European and Japanese financial sectors face losses of about $4.1 trillion
between 2007 and 2010. Of that amount, 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, which didn't estimate how much other financial firms such as
insurance companies and hedge funds, have written down thus far.

"Without a thorough cleansing of banks" balance sheets of impaired assets,
accompanies by restructuring and, where needed, recapitalization, risks
remain that banks' problems will continue to exert downward pressure on
economic activity," said the IMF's Global Financial Stability Report, its
twice-yearly review of the world's financial sector. While problems in the
U.S. mortgage sector are generally blamed for the global financial crisis,
the IMF report, showed there 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
security 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 area
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. "The Europeans haven't appreciated just how bad their
situation is," said Adam Posen, deputy director of the Peterson Institute
for International Economics, a Washington D.C, think tank.

In certain areas, the IMF has a bleaker outlook than some prominent Wall
Street bears.

For example, the fund is projecting 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 to 3.5%, 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
losses on credit cards and other non-mortgage consumer loans, while losses
on business loans "seem in the early stages."

The IMF's conclusion that the banking industry's misery is far from over is
likely to cast a further cloud over the industry, even as several big banks
recently have reported quarterly profits. (The latest came Monday, with
Bank of America Corp. announcing that it earned $4.2 billion in the first
quarter.) Many banks' profits, however, have stemmed from a combination of
unsustainably high trading revenue and a variety of one-time gains. Bank
executives, investors and analysts are bracing for losses to continue
accelerating as economies around the world remain mired in recession,
leading more individuals and businesses to default on their loans.

On Monday, those fears led investors to flee the banking sector. Shares of
many top financial institutions, including Bank of America and Citigroup
Inc., suffered double-digit losses, and the KBW Bank Stock index tumbled
15%.

The IMF urged governments to "take bolder steps" in injecting capital
through common shares "even if it means taking majority, or even complete,
complete control of institutions." Government ownership may be necessary,
the IMF said, to restructure institutions.

The U.S. government has tried to avoid outright nationalization. But
Washington could go a long way to meeting the IMF's estimate of the $275
billion in equity that U.S. banks will need by 2010 by converting into
common shares the approximately $200 billion in preferred shares the
government owns in more than 500 U.S. financial institutions. Federal
banking regulators this month are wrapping up "stress tests" of the
nation's 19 largest banks, and industry experts believe the results will
uncover capital holes in the balance sheets of at least several big banks.
But private investors remain reluctant to pump money into the industry
until it's clear that losses have peaked.

---Bob Davis and David Enrich, The Wall Street Journal; bob.davis@wsj.com