Banks Need a Ton of Cash In Case of Insurers Downgrades

From Bloomberg:

Banks may need to raise as much as $143 billion to meet regulators' requirements should rating firms downgrade bond insurers, Barclays Capital analysts said.

Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Financial Group Inc. are cut one level from AAA, and six times more for downgrades by four steps to A, Paul Fenner-Leitao wrote in a report published today. Banks own $820 billion of structured securities guaranteed by bond insurers, the report said.

``This is a huge amount, but the assumptions we use are also very aggressive,'' Fenner-Leitao in London said in a telephone interview. The estimate shows how bank capital could be diminished in the event of significant downgrades, he said.

I haven't written anything on the bond insurers problems, largely because there are so many issues to write about it's hard to pick and choose. However, the issues surrounding the bond insurers are huge and could pose a huge problem if these companies go belly-up or are downgraded as the story above illustrates.