COLUMN-Banks to trample growth in rush to deleverage

By James Saft

LONDON (Reuters) - The process of taking leverage out of the financial system, only now in its early stages, will put an increasing drag on economic growth and corporate profits.

Deleveraging, cutting back on the amount borrowed as compared to equity, is the dominant theme in markets and economics in 2008 as the financial system recoils from the massive losses in structured finance and the housing bubble.

Those losses -- which are still mounting and being recognised -- have piled up faster than banks can raise new capital, leaving the system today more extended than it was before the crisis began.

JP Morgan has estimated that banks have raised more than $300 billion (150 billion pounds) in new capital, as compared with $400 billion in recognised losses, a figure others have estimated could ultimately reach $1.3 trillion.

And since markets are now more volatile, which requires more equity as a cushion, and in light of what will be huge regulatory pressure to take less risk, investment and commercial banks will be trimming their sails for a long time to come.

While banks and other financials are scrambling to cut back on their lending, there is also pressure to make what debt financing remains longer term, especially among investment banks chastened by the flameout of Bear Stearns.

"Broker-dealers were very reliant on short-dated funding," said Jan Loeys, head of global asset allocation at JP Morgan in London.

"To avoid all going the Bear Stearns way they are scrambling to get proper long-dated funding. That is an avalanche at the moment which the bond market is having trouble absorbing."