Banks Need $875 Billion in New Equity, IMF Says

By BOB DAVIS and DAVID ENRICH WASHINGTON -- U.S. and European banks need to raise $875 billion in equity by next year to return 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 said. The steep funding requirements reflect a financial crisis that continues to deepen, 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 written down $1 trillion of those losses, said the IMF; it didn't estimate how much other financial firms have written down thus far. "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 blamed for the financial crisis, the IMF report shows that other regions played a big role. About $2.7 trillion of the losses from 2007 to 2010 were attributable to the U.S. market, the IMF said, while $1.2 trillion came from bad loans and securities losses in Europe. The IMF projects that 7.9% of U.S. loans will have gone bad by next year. In a report, Calyon Securities analyst Mike Mayo predicted that losses will crest at 3.5% of loans, a level that he said will slightly eclipse the peak rate during the Great Depression. Mr. Mayo estimated that U.S. banks are about a third of the way through accounting for losses on nonmortgage consumer loans, while losses on business loans "seem in the early stages." Despite the grim message, some IMF officials said improvements in a few markets in the past month point to the possibility that write-downs could come in below the report's projections. Market improvements have not been significant enough to alter the overall outlook, said Jan Brockmeijer, deputy director of the monetary and capital-markets department. Some of the biggest improvement has come from emerging-market spreads. On Tuesday, Colombia became the third country, after Mexico and Poland, to seek new IMF credit lines. —Tom Barkley contributed to this article. Write to Bob Davis at bob.davis@wsj.com and David Enrich at david.enrich@wsj.com