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Commercial banks in the 16-nation euro region may lose a further US$283 billion ($450 billion) by the end of next year as the financial crisis forces them to write off bad loans, the European Central Bank (ECB) 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," the ECB said in its June Financial Stability Report.
ECB staff estimates suggest the total amount of potential writedowns over the period 2007 to 2010 "could amount to around US$649 billion".
Around US$365 billion of writedowns have already been reported, it said.
Deutsche Bank, Germany's biggest bank, has booked about US$14.9 billion in writedowns and credit losses since the US sub-prime mortgage crisis began, less than US$2 billion of which were related to sub-prime loans.
Worldwide losses tied to distressed loans and securitised assets may reach US$4.1 trillion by the end of 2010, the IMF said in April.
"There is no room for complacency because the risks for financial stability remain high, also bearing in mind that the credit cycle has not yet reached a trough," ECB vice-president Lucas Papademos said.
The ECB expects the euro-region economy to contract by around 4.6 per cent this year and 0.3 per cent in 2010. Inflation is expected to average just 0.3 per cent this year.
"Banks should be encouraged to take advantage of the governments' commitments for support and strengthen their capital buffers," Papademos said.
Still, because buffers have been maintained above the minimum regulatory requirements, euro-area banks "appear to be sufficiently capitalised to withstand severe but plausible downside scenarios," he said.
- BLOOMBERG
