Banks have failed to make adequate provision for the losses on loans and securities they face before the end of next year, a new report from Moody's Investors Service says.
As a result, U.S. banks may incur about $470 billion of losses and writedowns by the end of 2010, potentially causing them to be unprofitable next year.
Plus, higher credit and funding costs may force a re-pricing of credit, Moody’s said.
“Large loan losses have yet to be recognized in the banking system,” the report noted.
“We expect to see rising provisioning needs well into 2010.”
“The fundamentals of financial institutions are still traveling on a downward slope,” Moody’s said. “No-one should consider recent improvements as assurance that the current rebound can be sustained.”
The report also noted that banks would be additionally challenged by having to deal with tighter regulation.
The problem isn’t confined to the United States.
Christian Clausen, CEO of Nordea Bank, says Nordic lenders have yet to reach the pinnacle of their bad-debt problems.
"The risk for somewhat higher loan losses has increased," Clausen told Dow Jones Newswires, referring to both Nordea and to the Nordic banking sector in general.
Meanwhile, German newspapers report that the German government may force banks to take state aid to ward off a credit crunch later this year.
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