NEW YORK (Bloomberg) — Banks holding about $120 billion in asset-backed securities that would be most affected by downgrades of bond insurers may have to write down as much as $30 billion of the debt, Moody's Investors Service said.

Downgrades of MBIA Inc., Ambac Financial Group Inc. and other bond insurers would require 20 banks to post at least $7 billion to $10 billion in reserves on debt backed by sub-prime mortgages, and $20 billion to $30 billion in more severe stress, Moody's said. The ratings company said its scenario is based on confidential data and wouldn't reveal the names of the 20 banks.

"Moody's has not yet reached any definitive conclusions about whether or not specific rating actions may be required on banks or securities firms as a result of their guarantor exposures," David Fanger, the chief credit officer for financial institutions at New York-based Moody's, said in a statement.

Such capital requirements would crimp the banks' ability to fund other loans. Citigroup Inc., Merrill Lynch & Co. and more than 20 other banks and securities firms have already suffered $146 billion in trading losses and write-downs from the collapse of the market for sub-prime-mortgage securities, which are based on loans to people with poor or limited credit histories.

Public disclosure about financial guarantees on asset-backed collateralised debt obligations is limited and Moody's is still analysing data on the 20 banks, Fanger said. A larger number also face write-downs on securities tied to sub-prime and home-equity loans, Moody's said, without citing any banks by name.

"We do not believe the impairment on those instruments will be as severe," Fanger said.

New York Insurance Department superintendent Eric Dinallo has proposed splitting the bond insurers' municipal insurance units from their unprofitable businesses of guaranteeing debt linked to sub-prime mortgages. A separation may preserve AAA rankings for securities sold by local governments and agencies, while allowing asset-backed securities to slide.

FGIC Corp., the third-largest bond insurer, sought permission to split last week. Dinallo said MBIA and Ambac, the market leaders, may do the same if they can't raise capital. The companies and Bermuda-based Security Capital Assurance Ltd. insure about $1 trillion of municipal debt and $580 billion of other securities, including collateralised debt obligations that package bonds into new securities.