Report highlights difficulties in raising capital.

Standard & Poor’s has warned that the global financial sector faces its most difficult test yet in the second half of 2008.

In a report published this week titled, Global Financial Institutions Eye Another Wave of Write-Downs as US Housing Woes Spread, the rating agency said the world’s financial institutions will face greater securities write-downs together with rising loan losses.

Standard & Poor’s credit analyst Scott Bugie said: “The overlap of these two phases may prove to be the most difficult test yet for the battered global financial sector.”

The agency said the financial industry had generated a large amount of capital in the past year to compensate for securities losses, but with market conditions being less favourable, there would be fewer opportunities to raise additional capital.

Bugie continued: “The success in future capital raising, through issues or asset sales, to compensate for additional securities write-downs, will be the key factor driving the credit ratings on many global financial institutions in the second half of this year.”

S&P said the global financial industry remained dependent on the declining fortunes of the US housing market. Securities backed by US mortgage loans had lost hundreds of billions of dollars in value since summer 2007, it added.

The losses have spread beyond sub-prime, which represents only 10%-15% of residential real estate borrowing in the US, to other pressured areas of US housing finance.

The group claimed that Citigroup, Merrill Lynch and UBS accounted for 40% of the more than $300bn in write-downs of mortgage-backed securities (MBS) and leveraged loans during the first half of 2008.

The exposure to write-downs is widespread with intermediaries and investors from around the world having participated in the financing of the US housing market during its boom years.

S&P expects the collapse in Lehman Brothers and the unwinding of the bank’s trades to place additional downward pressure on the value of sub-prime MBS via forced sales in unfavourable market conditions.