Why Banks Still Won't Lend

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Banks don't seem to know, either. They also are hoarding capital out of fear. Under federal rules, banks are required to maintain a certain level of capital based on their assets. When they incur losses, they either have to raise more capital or sell assets to keep those ratios in check. After raising money from outside investors and receiving bailout money in recent months, most big banks comfortably meet the federal capital standards.

But those calculations don't necessarily take into account all the problematic assets on banks' balance sheets. For example, they don't include securities whose losses seem to be temporary. In this environment, those losses can quickly become permanent, notes Stuart Plesser, an equity analyst with Standard & Poor's (MHP).

Meanwhile, big banks face another wave of losses, which may only further erode their capital. Companies have already taken huge hits from subprime mortgages and other risky debt. But other problems loom in credit cards, commercial real estate, and traditional home mortgages. In an interview with Maria Bartiromo, economics professor Nouriel Roubini of New York University's Stern School of Business said that credit losses will top $2 trillion, up from around $1 trillion today.

Even if the government forks over the remaining $350 billion of its Troubled Asset Relief Program to banks, the capital will still be a drop in the bucket compared with the industry's total losses. Given that, Roubini and others figure it's only a matter of time before the government creates another bailout fund. "Banks don't have enough money to bear the risk," says Anil Kashyap, a University of Chicago Booth School of Business professor. "We're going to need Tarp II and Tarp III."

With Matthew Boyle in New York.
Der Hovanesian is Banking editor for BusinessWeek in New York. Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.