New writedown at HSBC

May 12, 2008

The BBC reports on the latest subprime writedown at a major bank. The conventional wisdom is that most of the subprime related credit losses that have to be taken already have been. Going forward, a larger problem for bank net income will likely be increasing provisions for loan losses, as opposed to straight writedowns on holdings gone South. Here’s a list of writedowns to date for major banks worldwide:


  • Citigroup: $40.7bn
  • UBS: $38bn
  • Merrill Lynch: $31.7bn
  • HSBC: $15.6bn
  • Bank of America: $14.9bn
  • Morgan Stanley $12.6bn
  • Royal Bank of Scotland: $12bn
  • JP Morgan Chase: $9.7bn
  • Washington Mutual: $8.3bn
  • Deutsche Bank: $7.5bn
  • Wachovia: $7.3bn
  • Credit Agricole: $6.6bn
  • Credit Suisse: $6.3bn
  • Mizuho Financial $5.5bn
  • Bear Stearns: $3.2bn
  • Barclays: $3.2bn

Source: Bloomberg and company reports

The main impact of credit losses is that they reduce bank lending. A handy way to think about it, is that banks typically lend out $10 for every $1 in capital on the books. So credit losses of this magnitude can be incredibly DEflationary.

Inflation is driven by an expansion in the supply of money relative to goods and services that can be purchased with that money. Deflation is the opposite: a contraction in the supply of money.

What is money? Besides physical currency, credit is also money. You can use credit (provided by a home equity loan or credit card) just the same as cash to buy goods and services in the economy.

To the extent that credit is removed from the economy, the supply of money to buy goods/services shrinks. Deflation.

Credit losses reduce the capital held by commercial banks, shrinking the amount of credit they are able to extend to various groups in the economy.

This is likely why Bernanke is stepping on the monetary gas pedal in the face of rising food and energy prices: he’s more worried about the deflationary impact of contracting bank balance sheets than he is about the inflationary impact of lower interest rates.

And yet banks have done a fairly good job replenishing the capital they’ve lost due to writedowns. This they’ve done by raising new capital through stock offerings, dividend cuts, et cetera. I will update this post when I can find a running total for bank capital raised.

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