The bank crisis is not over: and muddling through is no answer.

• Author: Sinn, Hans-Werner

As America's various rescue plans take hold, stock markets are recovering somewhat. The S&P 500 price/earnings ratio is gradually climbing back to its long-term average of sixteen. Bank shares in particular are rebounding, and some banks have even succeeded in repaying at least part of their government-provided capital.

But, as I point out in my new book Casino Capitalism. this may only be a temporary improvement in expectations rather than a sign of permanent recovery, as the size of the banks' hidden losses on their balance sheets is probably enormous. According to the International Monetary Fund's most recent estimates, the total write-offs on financial claims in this crisis will be $4.05 trillion for the United States, Japan, the Eurozone, and the United Kingdom, of which the United States alone will have to absorb $2.7 trillion.

But according to my calculations of Bloomberg data, just $1.12 trillion had actually been written off worldwide by February, 2009. This suggests that only a quarter of the necessary write-offs have been realized.

For the United States and Switzerland, this is particularly bad news, as in both countries the realized write-otis already amount to 53 percent and 54 percent of the aggregate balance sheets of their national banking systems, which corresponds to 4.4 percent or 15 percent of GDP, respectively. The Netherlands, the United Kingdom, and Germany should also be concerned, as they come next in the ranking of countries whose banking systems have been hit hardest by the crisis. Their write-offs were 2.0 percent, 4.2 percent, and 2.8 percent of GDP, respectively, which corresponds to 11 percent, 16 percent, and 22 percent of the aggregate equity stock of their banking systems.

These frightening numbers raise doubts about the stability of the West's financial system, and they dwarf all measures, such as "bad banks" and government guarantees, that attempt to solve a mere liquidity crisis. The banking system is not primarily suffering from a temporary breakdown of the inter-bank market and a transitory decline in asset values that could be overcome simply by waiting for recovery. Rather, the banking system is at the brink of insolvency, with a permanent loss in equity capital.

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