US banks are set to lose a further $450 billion of existing capital over the next two years, Paul Ashworth, senior international economist at Capital Economics, said in research note.
The losses would be equivalent to 3 percent of US gross domestic product and 45 percent of existing bank capital, according to Capital Economics' calculations.
The "never-ending cycle of asset writedowns and mounting loan defaults" is hemorrhaging cash from the banks, Ashworth said. They will be forced to either sell assets; seek fresh funds or slash their loan books, he added.
Prospects of solid earnings plugging the funding gap are slim, Ashworth said.
Banks will find themselves competing for cash as they scramble to the raise funds needed, he said. Ashworth expects $350 billion to be raised by US banks, with up to half of that new capital coming from the government.
The $250 billion promised by the Treasury Department to backstop the sector won't be enough, he warned.
"If banks can’t raise even more capital, from either public or private sources, they will ultimately be forced to curb lending," Ashworth said.
In a worst-case scenario the fall in loans would rival the collapse in loans seen during the Great Depression when the value of outstanding bank loans fell by nearly half between 1928 and 1935, Ashworth said.