According to a recent edition of The Economist, "back-of-the-envelope calculations from Goldman Sachs suggest that if banks suffer a $200 billion loss on subprime mortgage but want to keep their capital ratios at an average level of 10 percent, that would stifle lending by a whopping $2 trillion".In other words, for each dollar of loan losses, banks might have to reduce loans by a multiple of ten times unless it can replenish its capital base.
CFO Magazine referenced a Bloomberg report which suggested that Wall Street's largest financial institutions alone could wind up writing down as much as $130 billion. The "largest" suggests that the number may not include some of the not so large U.S. financial institutions that have or will soon report subprime related losses. The same article suggests that the losses worldwide may be $300-400 billion!
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Tags : credit crunch , business loans , CFO Magazine , capital ratios , subprime losses
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