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IMF Global Financial Stability Report

 April 08, 2008 02:34 PM

The IMF has announced:

The widening and deepening fallout from the U.S. subprime mortgage crisis could have profound financial system and macroeconomic implications, according to the IMF's latest Global Financial Stability Report (GFSR).
At present, the issuance of most structured credit products—instruments that pool and tranche credit risk exposures in various ways—is at a standstill and many banks are coping with losses and involuntary balance expansions, the April 2008 report said. The report examines this and other forces that could push the current credit crisis into a full credit crunch, as well as offering policy recommendations to mitigate the impact.

[Related -Optimism Moving Back Into The Equation]

The full report is available online (all 211 pages!).

There is bound to be massive excitement regarding their estimate of $945-billion in total losses due to the credit crunch - this has already been picked up by the Globe and Mail and, in turn, by Financial Webring Forum.

This figure comes from Table 1.1 of the report, and is most interesting since it is in two parts: the first half of the table estimates losses from Unsecuritized US Loans as being $225-billion on $12,370-billion outstanding (= 1.8%), while the "Estimate of Mark-to-Market Losses on Related Securities" is $720-billion on $10,840-billion outstanding (=6.6%). This is not entirely due to the somewhat different mix of these sectors - unsecuritized commercial real estate has an estimated loss rate of 1.25%, while CMBS has a loss rate of 22.3%. There will undoubtedly be some screaming that the bad paper was securitized, but let's have a look at the methodology for the estimates, found in Annex 1.2 on page 46 of the report (page 63 of the PDF):

Losses on different types of loans were estimated from regression analysis using various relevant factors, such as changes in unemployment, lending standards, and housing and commercial real estate pricing, as relevant. In each case, the outstanding stock of the type of loan was multiplied with the change in the forecasted loss (charge-off) rate. The underlying historical data on loan loss rates and changes in lending standards were obtained from the Federal Reserve.

Losses on residential and commercial mortgages were also estimated by a second procedure. This one involved a three-step process.

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