Credit crisis losses could reach $400 billion

Write-offs of losses on securities linked to US subprime mortgages could reach $400 billion, according to German finance minister Peer Steinbrück, speaking after the recent G-7 meeting in Tokyo.

This latest estimate is quickly approaching Moody’s worst-case scenario figure of $450 billion. Banks and securities firms have marked down over $100 billion of losses since the beginning of 2007, partly due to their exposure to structured investment vehicles such as collateralised debt obligations (CDOs) backed by US residential mortgages.

G-7 finance ministers and central bank governors met on February 9 to discuss issues facing the world economy, including the effects of the current global credit crisis. The G-7 has said it plans to act on the Financial Stability Forum’s (FSF) interim recommendations, released on February 5, “to rebuild confidence in the creditworthiness and robustness of financial institutions”.

The FSF recommended that financial institutions’ give timely and full disclosure of losses and valuation of structured products, called on regulators to improve transparency through the implementation of the Basel II framework, and recommended stronger liquidity risk management through the development of a global consistent approach by the Basel Committee.

In its report, the FSF also called for better understanding of financial institutions’ exposure to off-balance sheet vehicles, and improved transparency and origination standards in the originate-to-distribute model of structured products. It also criticized potential conflicts of interest and poor-quality information at credit rating agencies.

The FSF is a committee of international bank regulators and finance ministries set up in 1999 to promote international financial stability.

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