The huge losses inflicted on banks across the West by the credit crisis and past, lax lending are set to soar to $4 trillion (£2.75 trillion), the International Monetary Fund (IMF) said today.

Confirming massive loss estimates first revealed by The Times two weeks ago, the IMF says that the mounting toll on banks from the worst global recession since the Second World War is leading write-offs from loans to spiral.

In an analysis, the fund has sharply increased its estimate of losses on lending first made in the US for a second time, to $2.7 trillion. That is up from an initial forecast of slightly less than $1 trillion and an updated $2.2 trillion estimate released six months ago.

For the first time, the IMF has also produced estimates of likely losses inflicted on banks across key economies from lending originated in Europe and Japan.

It now puts likely total losses due to European lending at $1.19 trillion, and those for Japan at a comparatively modest $149 billion.

Two thirds of the total $4 trillion in write-offs are set to be made by banking groups, the IMF believes, with the rest affecting insurance groups and other types of financial institution.

Losses by British banks in 2009-10 alone are put at $200 billion, compared with $750 billion for European banks, and $550 billion for those in the US.

The vast scale of the losses and writedowns, released by the fund today in its twice-yearly Global Financial Stability Report, will massively increase the need for banks across the West to raise huge amounts in new capital, or be given capital injections by national governments.

To restore banks’ financial strength, measured by the amount of capital they have to back outstanding lending, to levels immediately before the present crisis erupted, the IMF says that banks need a total of $775 billion in fresh funding.

British banks would require $125 billion, US banks $275 billion, and eurozone institutions some $375 billion.

But the IMF warns that the capital needed could be very substantially larger.

To restore banks’ financial strength to the more secure levels of the mid-Nineties, it puts the capital required at almost $1.5 trillion — $250 billion for UK banks, $500 billion for US banks, and $725 billion for those in the eurozone.

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