Tags: germany | banks

Germany Regulator: Banks Face Major Meltdown

Tuesday, 26 May 2009 10:28 AM

By Dan Weil

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If you think U.S. banks have it bad, take a look at Europe.

An internal memo from Germany’s financial regulator BaFin says German bank losses may end up totaling $1.14 trillion — twice the total of all banks’ reserves.

As a result, financial institutions face the threat of a major meltdown unless they take advantage of a government aid plan, BaFin maintains.

The markets will "kill" banks that attempt to make it on their own, BaFin’s President Jochen Sanio tells the London Telegraph.

If the banks’ $278 billion of bad debt isn’t addressed, they risk a round of "brutal" downgrades of their mortgage securities by rating agencies, he says. That would shrink the banks’ capital even further, creating systemic risk for the financial system.

"We must make the banks immune against the changes in ratings," Sanio implores.

The banks’ soured loans could explode "like a grenade," he warns. "We are pretty sure that within a month or two our banks will feel the full force of the sharpest recession ever on their credit portfolios."

The IMF says banks in the 16-nation euro zone need to raise $375 billion more of capital. That dwarfs its $275 billion projection of U.S. banks' capital needs.

Others are concerned about European banks too. “What we’re going to have to see is just more time, more healing working through the financial sector before it can get back on its feet,” Andy Lynch, stock fund manager at Schroders, tells Fox Business News.

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