BOE: The Global finance's toxic debt losses now $2.8 trillion (Update 1)

Men look at a stock quotation board outside
a brokerage in Tokyo October 28, 2008.
Reuters/Toru Hanai
Losses incurred by the world's major financial institutions on "toxic" assets hoovered up in the final boom years have hit $2,800bn (£1,800bn), according to the Bank of England.



The Bank's estimates on the size of writedowns facing banks, insurers and hedge funds – published today in its Financial Stability Report – have more than doubled since its last update in April, and raise the spectre of massive new provisioning by Britain's troubled lenders. Royal Bank of Scotland, for one, is expected to reveal another £4bn of writedowns on Friday.

In the UK, the Bank calculates, "mark-to-market losses" have hit £123bn compared with the £63bn estimated in April. To date, Britain's lenders have collectively written down less than £20bn, though the Bank conceded that the market may be overstating the losses by reflecting "substantial discounts for uncertainty".

Losses in the US have jumped from $739bn to $1,577bn, the Bank says, and from €344bn to €785bn in Europe. Governments have agreed to inject around $4 trillion into banks and markets to contain the worst financial crisis in 80 years.

For five of Britain's biggest lenders, Barclays, HBOS, HSBC, Lloyds TSB, RBS and Nationwide Building Society, the problems are compounded by deteriorating loan books. Once bad debts on mortgages, credit cards and corporate loans are added to their "toxic" writedowns, the Bank expects credit losses to total as much as £130bn over the next five years.

The scenario appears to have been used by the Bank to calculate the £51.4bn of capital required as part of the state bail-out. "This delivers estimated capital shortfalls of £50bn in aggregate to maintain UK banks' capital at current levels," the Bank said.

Without the bail-out, which will see the taxpayer inject £37bn into the sector and provide £450bn of funding, banks would have had to shrink their balance sheets, "potentially causing customer lending to contract", the Bank said. A contraction in lending would have been unprecedented. Lenders have not withdrawn credit in the 26 years the Bank has compiled the data, Morgan Stanley analysts said. Annual lending fell once, in the year to May 1994, due to declining demand.

Despite the rescue, the Bank expects credit growth to slow markedly – from 21pc in 2005 to just 4pc next year – as lenders shrink their £740bn "customer funding gap" to 2003 levels of £265bn.

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Sources :

1. Telegraph.co.uk: Toxic debt losses now £1,800bn, say Bank,October 28, 2008 08:37AM GMT
2. Reuters: Global finance could lose $2.8 trillion in crisis,October 28, 2008 05:16am EDT

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