Feb. 15 (Bloomberg) -- The world's biggest banks may have to book as much as $203 billion of writedowns, in addition to the $152 billion reported so far, if bond insurers the lenders rely on become insolvent, UBS AG said.

``Risks are still rising on many fronts; the problem is broadening from just subprime,'' London-based UBS analyst Philip Finch said in a note to investors today. ``We expect more writedowns.''

MBIA Inc. and Ambac Financial Group Inc., the No. 1 and No. 2 bond insurers, are struggling to maintain their AAA credit ratings following losses on residential mortgages. Banks may be forced to write down the value of securities protected by contracts with the so-called monoline insurers if their financial condition deteriorates, Finch said. The New York-based companies guarantee the repayment of bond principal and interest in the event of defaults.

Ambac became the first monoline insurer to receive a downgrade, when Fitch Ratings cut it to AA from AAA in January, citing ``significant uncertainty'' over the insurer's business model.

The cost of protecting banks from default soared on concern a proposal to break up MBIA and Ambac may trigger further credit market losses.

Writedowns at the world's largest banks on so-called collateralized debt obligations and subprime-related losses may increase by $120 billion, UBS's Finch wrote. The lenders may have to book charges of $50 billion for structured investment vehicles, $18 billion for commercial mortgage-backed securities and $15 billion for leveraged buyout loans, UBS said.

Breakup Concern

``Liquidity conditions are still far from normal,'' the note said.

Credit-default swaps on the Markit iTraxx Financial index of 125 banks and financial institutions rose 10 basis points to 104 as of the close of trading in London, according to JPMorgan Chase & Co. The Markit iTraxx Japan index rose 4 basis points to 86, Morgan Stanley prices show.

New York Insurance Department Superintendent Eric Dinallo said regulators are trying to help the two biggest bond insurers raise $15 billion to avert rating downgrades that may endanger the $1.2 trillion of debt they guarantee worldwide. One option is to split the insurers' municipal bond business from their money-losing subprime-mortgage units, Dinallo said in a Bloomberg Television interview yesterday.

A regulatory backlash against the banks also threatens to cut profits in the global banking industry by 5.3 percent this year, which could result in additional capital requirements for banks, according to Finch.

Blow to Earnings

Increased credit costs of 10 basis points would lower 2008 industry earnings to 5.9 percent from 10 percent, the report said. A basis point is 0.01 percentage point.

Goldman Sachs Group Inc., the biggest securities firm by market value, had its first-quarter profit estimate cut 51 percent today by Fox-Pitt Kelton Cochran Caronia Waller. The New York-based firm faces ``continued challenges in credit markets'' and may report a $1.7 billion writedown from leveraged loans, analyst David Trone wrote in a research note today.

UBS fell in Swiss trading today after Citigroup Inc. said Europe's biggest bank by assets may have to write down as much as 20 billion Swiss francs ($18.3 billion) this year on securities infected by the subprime debacle. UBS dropped 1.44 francs, or 3.8 percent, to 36.02 francs.

`Defensive Portfolio'

HSBC Holdings Plc, Europe's largest lender, Bank of America Corp., the biggest U.S. bank by market value, and UniCredit SpA, Italy's largest bank by assets, would be included among a ``defensive portfolio,'' the UBS analyst recommended.

HSBC fell 2.3 percent to 730 pence in London trading. Bank of America rose 1.1 percent to $42.70 at 4 p.m. in New York and UniCredit declined 3.4 percent to 4.84 euros.

Rising defaults on subprime mortgages in the U.S. last year sparked a collapse of global credit markets. The ensuing cash shortage led to writedowns by banks in the second half of 2007.

To contact the reporters for this story: Poppy Trowbridge in London at ptrowbridge@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net

Last Updated: February 15, 2008 17:09 EST