The global banking system is still struggling with major problems related to losses on 'toxic assets', primarily connected with housing and property loans. The losses have cut the capital bases of the banks, and this has led to a credit squeeze on the global economy. This is preventing the monetary policy mechanism from functioning normally, which in turn means the recession looks set to be unusu-ally long and deep. So far, the banks have reported write-downs and losses of a little more then USD 1000bn, but there can still be much more to come, according to the IMF. In World Economic Outlook Update, which was pub-lished in the past week, the IMF revised up its estimate for total losses in the banking system to USD 2200bn from its earlier estimate of USD 1400bn. In other words, only half of the forecast losses have surfaced so far.
Being able to emerge from the crisis requires that one finds a watertight and sustainable solution to the problems in the bank sector. There are a number of options being dis-cussed at the moment. One is to pump more capital into the banks as compensation for the losses that will inevita-bly occur. This was what happened in the US in the autumn with the first half of the USD 700bn from the so-called TARP fund. A second option being increasingly worked on is to free the banks of their 'toxic assets' and place them in a so-called bad bank, so the banking system can move on and ensure that lending functions as it should, thus easing the credit squeeze. This is the solution Sweden employed during its bank crisis in the early 1990s. A final option is that the government issues insurance on the toxic assets, with all losses beyond a certain limit (the bank's risk) being borne by the government. This would mean the maximum loss for the bank being known, and thus it would be easier to persuade private investors to place capital in the banks. The people involved are currently working flat out to find the best model, and concrete initiatives will probably emerge soon - perhaps as early as the coming week.
