Writer, president and chief executive officer of the Federal Reserve Bank of Minneapolis, who oversaw the troubled asset rescue program in 2008-09

At the beginning of the epidemic, I call Big Bank of America Raising $200 billion in equity as a preventive measure to ensure that they have enough funds to endure the severe recession caused by Covid.

Small businesses across the United States that have been forced to layoffs tell their landlords that they will not pay rent until the crisis is over. In turn, these landlords tell their banks that they will not pay the mortgage.

At that time of the Covid crisis, we didn’t know how accumulated costs would affect the banking industry. Much depends on how the virus develops and mutates and how the healthcare system responds.

Banks did not follow my advice. After more than a year, what happened? The Covid crisis is more serious than I feared. In the United States alone, 600,000 people died. This is the worst economic recession in history.

However, the loss of the banking industry is much smaller than my analysis. In fact, it is much smaller than predicted by the bank’s own loan loss model. Today, banks argue that they are a source of strength during the crisis and reiterate their long-standing calls for deregulation. Does their performance during the Covid downturn indicate that the large banks are strong enough? No, it is not.

The banking industry’s losses were much smaller than expected because the government was very active in providing financial support to households and businesses affected by the crisis. In the United States, Congress allocated nearly US$6 trillion for Covid-related support programs, enabling many companies to remain solvency and enabling families to pay rent, mortgages, auto loans, and credit cards, all of which ultimately supported the banks’ Balance sheet.

The fiscal authorities are right to support the economy so strongly and actively during the Covid downturn. But this is also a bank bailout. Without these fiscal interventions, the banking industry would suffer even greater losses. How big is it?

It’s difficult to be sure, but by comparing this recession with the losses that banks have faced in previous recessions, the staff at the Federal Reserve Bank of Minneapolis estimates that it is somewhere between 100 billion U.S. dollars and 300 billion U.S. dollarsThese estimates may be low, because without the active support of the government, the economy is unlikely to recover as quickly as it is now, and banks may still face losses.

To increase the transparency of these issues, the Minneapolis Federal Reserve has created a tool This allows the public, with or without financial support, to enter their own assumptions and estimate bank losses in their own scenarios.

We are now facing some basic policy issues. What economic shocks should banks be able to deal with on their own? Which shocks are suitable to rely on the support of taxpayers?

Most people intuitively understand that the Covid crisis is different from the global financial crisis. The pandemic is essentially a natural disaster that hits the global economy. Compared with airlines or hotel operators, banks are not wrong.

In contrast, banks helped create the conditions that led to the 2008 crisis, providing millions of non-performing mortgage loans. In both cases, without government support, the banking industry cannot bear the losses on its own and continue to provide credit to the economy.

In 2008, many large banks faced imminent failures, forcing the fiscal authorities to intervene at the last minute to prevent the collapse of the banking industry that could turn a deep recession into another Great Depression. In the context of the pandemic, the fiscal authorities took active actions to support the economy from the beginning and rescued the banking industry in the process.

We can never know in advance where the next crisis will come from, or who will be wrong when it comes. Our only tool to ensure that banks are resilient is to ensure that they always have sufficient equity.

Analysis by the Federal Reserve Bank of Minneapolis Many outside experts said that banks need about 20% of equity financing, higher than the current 13%, to prevent a serious economic recession, such as another real estate bubble burst or pandemic.

Banks oppose such proposals because higher equity levels will hurt their stock prices. The public must decide: Should banks rely on their own strength to maintain flexibility or always rely on the generosity of taxpayers?