Lending losses may reach two per cent

A working paper by a couple of researchers at the International Monetary Fund estimates the likely lending from Australian banks as being equal to two per cent of risk-weighted assets.

The IMF researchers used to two different methods to arrive at similar estimates; one derived from the pillar three disclosures of the four major banks and the second from a contingent claims analysis that estimates loss rates from company balance sheet data and share prices.

Working from pillar three disclosures the IMF research estimates total losses at around $42.5 billion. This would reduce the big four bank's combined capital adequacy ratio to 9.2 per cent.

To reduce this ratio to eight per cent (the now superceded minimum ratio) banks would need to increase their estimates of probability of default by six times from current levels.