In the wake of the stress-test results, it's become obvious to everyone that the Administration is counting on banks to earn their way out of trouble — recapitalizing themselves over the next couple of years via profits.
But Summers and Geithner, though they disagreed on some aspects of the stress tests, agreed that the asset prices were simply under attack from the liquidation vicious cycle, and that recapitalizing the banks and restoring confidence would stem the panic and restore some value to the bad assets.
The speech suggested that Bernanke had adopted a more favorable view of regulation, but he made no mention of using monetary policy to deflate speculative bubbles or of recapitalizing the banking system.
It turns out that may be enough to stem the European crisis for at least a few years, and go a long way to recapitalizing banks in the process.
It is "almost inevitable" Mr. Pettis said, that the recent credit splurge would lead to more nonperforming loans, or NPLs, and the burden of recapitalizing banks might ultimately fall on households.
The risk now is that Europe's resistance to recapitalizing its banks could turn into a broader crisis.
It said many advanced economies urgently needed to push ahead with financial system reforms including recapitalizing banks, revamping and consolidating banking industries and overhauling regulation.
The agency cited Spain's economic problems and the cost of recapitalizing its struggling financial sector, which Fitch said could reach as much as 100 billion euros, or $125 billion.
There has also been a string of negative reports from Ireland, where the bill for recapitalizing its tattered banking sector keeps rising, weakening the government's fiscal flexibility.
The cost of recapitalizing European banks (despite overly optimistic stress tests), including those in Germany, is estimated to be €420 billion under an adverse scenario, just for non-performing loans.
While the European Financial Stability Facility can already make loans to countries for the purpose of recapitalizing banks, this shift would be controversial.
