The $700 billion Troubled Asset Relief Program, which banks can access to bolster their capital positions, will help ease some of the damage as will Federal Reserve moves to ease monetary policy. The liquidity moves of 2008 have lagging effects that should take root in the coming months.
But banks will fail, and at numbers large enough to cause alarm.
"I do think some of the actions taken by both the Fed and Treasury will limit the failure, especially at the larger banks, that we have seen in the late '80s or early '90s," said Christopher Mustascio, managing director at Stifel Nicolaus. "But to think we're not going to see more failures in 2009 is probably naive."
The US saw 25 banks fail in 2008 and the number is expected to multiply this year into the hundreds.
While banks have been allowed relatively liberal access to the TARP funds, some are still burdened by huge losses suffered in the collapse of the subprime mortgage market as well as credit issues fed by consumer weakness during the recession.
In the case of Citigroup , its behemoth supermarket banking model became undone and the company was forced to sell its Smith Barney brokerage unitto Morgan Stanley .
At the same time, HSBC stumbled after analysts called into question its capital position, and Bank of America was hit after analyst Richard Bove of Ladenberg Thalmann cut his outlook of the firm because of steep losses it faces ahead due to its exposures on a number of fronts.
Shares across the sector tumbled Wednesday just as earnings season was kicking off, with JPMorgan Chase due to report Thursday morning.
"There's certainly going to be more bank failures in 2009 as the economic backdrop continues to deteriorate and the smaller banks start to feel the pain," Mustascio said. "In the past quarters much of the pain has been on larger banks, investment banks, on a mark-to-market basis that has been driving asset valuation writedowns. Now you've got a full-fledged recession...Some of these banks are not going to be able to deal with that, and you're going to see failures."
Same Problems, Only Worse
In essence, the story of 2008 will be the story of 2009, only amplified.
That's because the mortgage contagion will spread beyond simply the subprime group and start to hit prime borrowers as well who cannot meet their obligations due to rising unemployment and the intensifying recession.
"Stabilizing the banks through direct capital injections was a good first step but before things can be really stabilized the government's going to have to find a way to take the toxic assets off the books of the banks," said Mike Carlson, a partner with Faegre & Benson's restructuring group in Minneapolis. "Until that happens, things are not going to be able to move very quickly."