The sub-prime market shock has so far resulted in nearly $400 billion in loses and asset write-offs (and still counting) at the world’s biggest banks and brokers, but that's nothing compared to the $5 trillion hit they are facing now...
If you think the worst of the credit crunch is over… you’d better think again. New financial sector rules threaten to drain liquidity, and strangle consumer lending. U.S. and international accounting regulators are mulling rule changes on off-balance sheet financing that could impact up to $5 trillion in financial-sector assets.
You may recall that SIVs (structured investment vehicles) where much in the news last summer. These off-balance-sheet entities mushroomed in recent years, and were responsible for deepening the sub-prime crisis when credit markets dried up last year.
Trillions of dollars in financial sector assets still reside in a shell-game of off balance sheet holdings. They continue to weigh down the financial sector like a heavy anchor chain.
It's true that many banks and brokers have raised capital to strengthen balance sheets, but billions more would be needed to finance these off-balance-sheet assets. That’s because regulators may soon annonuce new rules that would require these shady assets to be placed back on the books where they belong.
This won’t affect liquidity at big banks, but it will severely impact their regulatory capital ratios. Banks and brokers must meet certain debt-to-equity ratios, and net-capital requirements. A big increase in balance sheet assets (formerly kept hidden away off-the-books) would require either increased equity capital – or further cuts in bank lending and leverage.
Since the global financial sector is already struggling through a painful de-leveraging now, these “good” accounting rules are coming at a very “bad” time.
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