Foreign banks face $475 billion subprime losses

Three researchers at the Fed's international finance division in Washington, DC found foreign investors held $1.2 trillion in securities backed by US-issued assets. Once US exposure to foreign assets was netted out, net foreign exposure to US asset-backed securities (ABS) was $800 billion. Their results are available from the Federal Reserve in the discussion paper Foreign exposure to asset-backed securities of US origin by Daniel Beltran, Laurie Pounder and Charles Thomas.

The researchers warned looking at mark-to-market losses would overstate the size of long-term or "ultimate" losses. In the long run, assuming 20% default rates and 50% recovery, foreign investors would suffer $65 billion losses on US mortgage ABS and another $10 billion on other ABS, such as credit card and auto loan ABS, which are expected to default less frequently.

But the lack of liquidity and transparency meant mark-to-market losses could be far higher - as much as $475 billion, the researchers estimated. The difference was also explained by the fact that mark-to-market losses ignore the repackaging and resale of US ABS by foreign banks - thus reducing their ultimate loss. In fact, foreign investors hold a net share of 29% of non-conforming US residential mortgages - in line with their holdings of other asset classes such as bonds and Treasury securities.

See also: Deutsche succumbs to crisis with €141m Q1 loss
UBS report lists failures in risk management 
Bank writedowns - is the worst over?
Credit Suisse reveals $2.85bn subprime credit writedown

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here