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Is the Bank Crisis Over?

MUNICH – As America’s various rescue plans take hold, stock markets are recovering somewhat. The S&P 500 price/earnings ratio is gradually climbing back to its long-term average of 16. Bank shares in particular are rebounding, and some banks have even succeeded in repaying at least part of their government-provided capital.

But, as I point out in my new book Kasino-Kapitalismus , this may only be a temporary improvement in expectations rather than a sign of permanent recovery, as the size of the banks’ hidden losses on their balance sheets is probably enormous. According to the International Monetary Fund’s most recent estimates, the total write-offs on financial claims in this crisis will be $4.05 trillion for the United States, Japan, the euro zone and the United Kingdom, of which the US alone will have to absorb $2.7 trillion.

But according to my calculations of Bloomberg data, just $1.12 trillion had actually been written off worldwide by February, 2009. This suggests that only a quarter of the necessary write-offs have been realized.

For the US and Switzerland, this is particularly bad news, as in both countries the realized write-offs already amount to 53% and 54% of the aggregate balance sheets of their national banking systems, which corresponds to 4.4% or 15.0% of GDP, respectively. The Netherlands, the UK, and Germany should also be concerned, as they come next in the ranking of countries whose banking systems have been hit hardest by the crisis. Their write-offs were 2.0%, 4.2% and 2.8% of GDP, respectively, which corresponds to 11%, 16% and 22% of the aggregate equity stock of their banking systems.