Page 34 - Accelerating out of the Great Recession

THE DAMAGED ECONOMY

(those belonging to the single European currency) and the
United Kingdom will suffer a net loss of about $140 billion. To
reach precrisis leverage levels (a 4 percent ratio of tangible com-
mon equity to tangible assets), U.S. banks will need $130 billion
in fresh capital, banks in euro zone countries will need $310 bil-
lion, and U.K. banks will need $120 billion on top of what has
already been raised.
However, if governments and regulators require capital
requirements to match those that prevailed during the mid-
1990s (a 6 percent ratio of tangible common equity to tangible
assets), then 50 percent more capital would be needed. In the
United States and all of Europe, the IMF estimates that the
demand for fresh equity in banks amounts to more than $1 tril-
lion, applying leverage levels of the 1990s.
In order to stabilize the banking system—which is as crucial
for the economy as a whole as it is for the financial sector—a
recapitalization is required. This could be achieved by the fol-
lowing actions:

1. Buying assets at inflated prices.
2. Direct capital injections.
3. Receivership and reorganization—the approach that the
United States used in the savings and loan crisis in the
1980s and that Sweden used in its banking crisis in the
1990s.

Unfortunately, governments shy away from such direct inter-
ventions not only because of the costs involved but also because
the approaches—with the exception of the third—involve the
transfer of taxpayer money to the shareholders and bondholders of
the failing institutions. Only in the case of receivership do share-

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