In its January Global Financial Stability Report Market Update (published January 28, 2009), the IMF has raised their estimate of credit losses from bad assets originated in the US and held by US and European banks to $2.2 trillion (from $1.4 trillion estimated in November). It also estimates the combined need of US and European banks for new capital at $0.5 trillion. Finally, the Fund recommends that the authorities take the distressed assets from the banks’ balance sheets through ‘bad bank’ arrangements.
Note that we are no longer just talking of ‘toxic’ assets, that is, assets whose value cannot be assessed with any degree of certainty because of their complexity. We are now talking about bad or impaired assets that include the toxic stuff but also a large chunk of plain vanilla assets (real estate loans, simple mortgage products, consumer loans, corporate debt) that have become impaired because the borrowers/issuers are at risk of going belly-up the old-fashioned way. With a long and deep recession still ahead of us, the quantity of ‘conventional’ bad assets on the books of the banks will escalate.