Broader credit deterioration, a weakening economy, and falling credit prices combine into a substantial hit to the capital of systemically important financial institutions.

We estimate aggregate potential writedowns and losses to be approximately $945 billion as of March 2008 (see Table 1.1 and Annex 1.2 for details on the methodology).23,24 Aggregate losses are on the order of $565 billion for U.S. residential loans (nonprime and prime) and securities and $240 billion on commercial real estate securities. Corporate loans (including leveraged loans and CLOs) are expected to account for $120 billion of losses, while consumer loan losses are likely to add an additional $20 billion. Most of the nonprime losses are in securities rather than unsecuritized loans. At present, pricing of mortgage-related derivative indices suggests higher losses than do calculations based on projected cash fl ows for the underlying loans.25 Since the October 2007 GFSR, ABS prices have declined between 20 and 40 percent across tranches rated AAA to BBB–, and as much as 50 percent on ABS collateralized debt obligations (ABS CDOs) across all ratings categories, refl ecting market expectations of future deterioration and illiquidity of the underlying securities. (See Boxes 2.2 to 2.4 in Chapter 2 for more details on the fragility of structured product ratings and their valuations.) Market prices continue to adjust on an almost daily basis, pressuring markto- market losses higher.

Potential credit losses would lower aggregate capital adequacy ratios at U.S. banks by about 250 basis points, and at European banks by about 150 basis points. Although aggregate ratios remain above regulatory norms, a bottomup analysis of losses indicates that some banks and regions will suffer disproportionately. Put in historical perspective, this crisis is of similar dollar magnitude to the Japanese banking crisis of the 1990s (Figure 1.12).

Uncertainty over the size and spread of losses further elevates systemic risks, even as markets price in losses for banks and insurance companies.

Global banks are likely to shoulder roughly half of aggregate potential losses, totaling from $440 billion to $510 billion, with insurance companies, pension funds, money market funds, hedge funds, and other institutional investors accounting for the balance.27 Banks generally hold the most senior tranches of these products, but even these are now likely to incur substantial losses (see Boxes 2.3 and 2.4 in Chapter 2). European banks hold sizable amounts of complex structured products such as MBS and CDOs and have been exposed to losses related to structured investment vehicles (SIVs) (Figure 1.13).