Have banks turned a corner?

• The value of key collateral on loans is still falling. About half of bank lending is tied to real estate, which shifted from boom to bust in many parts of the United States. The typical home price is down more than 20 percent nationwide, and lately, it's been falling by about 2 percent a month. If that continues, it boosts both the likelihood of defaults by borrowers and the losses for banks when they resell those homes after foreclosure.

• Loans are going delinquent faster than banks are adding to reserves to cover those losses, the FDIC finds. That could hit bank profits down the road.

• Accounting methods may be hiding key problems. Banks say that a shift away from so-called mark-to-market accounting is a more accurate reflection of the assets' worth, and they may be right. But the resulting values could also prove to be too rosy. Take that pool of risky assets at Citigroup, which the bank is valuing at $101 billion. A mark-to-market approach would put the value at $29 billion, Citigroup says.

• Losses could outweigh capital on hand. Collectively, US banks have equity capital of $1.2 trillion, or about 10 percent of their loans, the FDIC says. Economists including those at the International Monetary Fund (IMF) warn that bank losses – including those not yet recognized in charge-offs – are larger, possibly exceeding $2 trillion.

"It could wipe out their equity capital," says Peter Nigro, a former economist at the Office of the Comptroller of the Currency, now at Bryant University in Smithfield, R.I.

Taken together, the negative forces make it very hard for banks to earn their way out of losses by relying on their interest-rate spreads.

"What the yield curve is doing is ... mitigating those losses a little bit," says Mr. Lachman, who has worked at the IMF.

Moreover, he expects that European banks will see rising loan problems this year, with ripple effects that hurt US banks as well.

All these challenges don’t mean that some of America’s large banks will fail. The Obama administration has tried to put in programs to bolster the biggest ones with capital as needed.

In one part of the plan, Treasury Secretary Timothy Geithner has created incentives for private investors to buy troubled assets from banks. By absorbing much of the risk, the Treasury may succeed in boosting the price of those assets from what investors would ordinarily pay.

The other Geithner bank-rescue plan involves a “stress test” of the biggest banks. If the result is that some banks need more capital to weather the recession, they will be asked to raise it in the private markets or to receive an infusion from the government.

In a speech at Georgetown University in Washington this week, President Obama responded to critics who say this approach will cost more, or be less effective, than a tougher tactic in which troubled banks are taken over by the government and restructured.

“We will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy,” he said.

Still, any further assistance for banks faces a steep political hurdle. Congress and the American public have little appetite for more bailout money. And there’s not a lot left in the $700 billion TARP.

“I’ve got a lot of sympathy for Geithner,” Lachman says. “This is complicated stuff that is highly politically charged.”

For the economy to stage a strong recovery, banks need enough capital to lend strongly, economists say. That’s especially true because other channels of credit that were strong before the recession – debt securities funded by nonbank investors – have withered.

The risk, they say, is that the political pressures will prevent or delay an accurate assessment of bank losses – how big their write-downs should be and how much capital they need.

“The issue that still remains is, what are these assets on the bank balance sheets actually worth?” Mr. Nigro says. “We have to wait for results of the stress test.”

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