The IMF has lowered its global loss estimates to US$3.4trn, following recent mark-to-market improvements and capital raisings. However, estimates of bank write-downs were left broadly unchanged at US$2.8trn. With actual write-downs of around US$1.3trn through the first half of 2009, this estimate implies that losses still to be taken are around US$1.5trn globally, according to credit strategists at BNP Paribas.

In terms of the breakdown, US domiciled banks have recognised around 60% of total losses, with US$418bn in write-downs still to come. The reverse is true for the eurozone and the UK, for which the IMF estimates that only 40% of the losses have already been recognised. This leaves the eurozone with estimated additional losses of US$467bn.

The BNP Paribas strategists point out that these estimates are the result of an improved methodology for European bank losses, with a more detailed analysis across single economies following previous criticism of homogeneous treatment. In particular, there were significant changes to estimations of loan losses in the eurozone.

In contrast with the April estimate, where loan losses were based on the forecast profile of the US and relative security prices, the latest forecasts are based on a model that forecasts bank loan losses developed in coordination with the ECB. As a result, the cumulative loss rate for the eurozone loans over the period 2007-2010 was estimated at 3%, down from more than 4% previously and well below both the US (8.1%) and the UK (7.4%).

Even so, estimates of total losses and losses still to be taken from eurozone banks are higher than those provided by the ECB - which estimates total losses at US$650bn (versus the IMF's US$814bn).

"The good news is that, given capital raising to date and accounting for estimated earnings over the next two years, estimates of capital needs are manageable," the strategists note. US$150bn of new capital would be needed by eurozone banks to reach a Tier 1 ratio of 8%, according to the IMF. This compares with a total of US$437bn raised since the start of the crisis, of which US$92bn has come this year.

Results of the EU-wide stress test suggest that under the baseline scenario, reflecting current macroeconomic projections, banks' aggregate Tier 1 capital ratios will be well above 9%, compared to the present Basel minimum requirement of 4%. However, should economic conditions be more adverse than currently expected, this would have significant impact on the potential losses for the banks concerned. Under such an adverse scenario, the potential credit and trading losses over the years 2009-2010 could amount to almost €400bn, according to the stress-test results.

Nevertheless, the financial position and expected results of banks are also sufficient to maintain an adequate level of capital under such negative circumstances. Notably, the aggregate Tier 1 ratio for the banks in the sample would remain above 8% and no bank would see its Tier 1 ratio falling under 6% as a result of the adverse scenario. This resilience of the banking system reflects the recent increase in earnings forecasts and, to a large extent, the important support currently provided by the public sector to the banking institutions - notably through capital injections and asset guarantees - which has augmented their capital buffers, CEBS notes.

The objective of the stress-test exercise was to increase the level of aggregate information among policymakers in assessing the resilience of the European financial system, using a sample of 22 major European cross-border banking groups.

CS & JA