Jeremy Warner's Outlook: Think the unthinkable. Might bankers have to seek even more rescue capital?

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The Independent Online

Hard to believe, but this time last year the boom was still in full swing. House prices in some parts of central London were rising at an annualised rate of more than 30 per cent, getting a mortgage was as easy as plucking fruit from a tree, and "covenant lite" deals were all the rage among bankers desperate to lend to the leveraged buyout kings of the private equity and hedge fund scene.

If you had said back then that over the next 12 months bank share prices would fall by more than two-thirds and that bankers would be raising tens of billions of pounds in new equity to support balance sheets stretched to breaking point by bad debts, no one would have believed you.

Nor would they have believed you even a few months ago had you said that within the year, bankers might have to return for even more. Sadly, this is precisely the spectre now being raised by City analysts.

The amounts so far raised by British and other European banks just about pay for the impairment charges already made against mortgage-backed securities, leveraged loans, monolines and other forms of tradeable credit. But what happens if we now get a more conventional bad debt experience coming through as the economy heads south? This was again the question being asked by investors yesterday as bank share prices took a renewed beating.

In the event of a serious downturn, another round of rights issues might become necessary to restore capital ratios to safe levels. Would investors have the capacity to cope? Even if they did, would they be willing? Billions have already been expended bailing the bankers out from the consequences of their own folly. It's beginning to look like good money after bad.

The one thing that bankers have got going for them is that if investors want there still to be a banking system left at all, they may have little option. A year ago, everyone assumed that the banks had never been safer. Securitisation had allowed them to disperse credit risk in a manner never open to previous generations of bankers.

How wrong can you be? Destruction of capital is what bankers do best. It's in their DNA to overlend.

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