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Global bank losses resulting from write-offs on mortgage-backed and other badly devalued securities will spiral to US$2.8 trillion ($5.08 trillion) before the credit crunch is over, say new Bank of England estimates.
The figure is around double the bank's previous estimates and calculations by the IMF.
It suggests that, while the recent injections of bank capital by Governments may help stabilise the financial system, it is far from fully over the ravages of the credit crisis.
The bank says that losses for the UK's banks will run to £122.6 billion ($349.46 billion), against a forecast of £62.7 billion made in April.
For the US and the euro area, it gives figures of US$1.58 trillion (was US$738.8 billion) and 784.6 billion euro (previously 344.1 billion).
In its October Financial Stability Report, the bank says, "The global banking system has arguably undergone its biggest episode of instability since the start of World War I ...
"Risks in the financial system clearly remain. Over time, against the backdrop of an economic downturn, banks will need to adjust their balance sheets and funding models, weaning themselves off current exceptional levels of official support. Lending growth will take time to recover."
The £37 billion of share purchases by the Treasury in the British banks, and liquidity support, should buy the banks more time; however, the reduction in the growth of lending, even over a lengthier adjustment, will still be sharp.
John Gieve, deputy governor of the bank for financial stability, said: "The instability in the global financial system in recent weeks has been the most severe in living memory. And with a global economic downturn under way, the financial system remains under strain.
"But it is better placed as a result of the exceptional package of capital, guaranteed funding and liquidity support."
A new system of counter-cyclical capital requirements or "macroprudential tools" are needed, says the bank, "to ensure banks are in a stronger position ahead of the next downturn".
The bank also warns of some particular weaknesses in the financial system.
Leveraged investors such as hedge funds, says the bank, "may be forced to liquidate asset holdings due to tighter credit conditions".
Insurance firms "seem relatively well placed", the report says, but "risks could arise, however, if the value of insurance companies' investments were to fall below regulatory capital requirements".
The bank cautioned about the fragile state of the commercial property market.
The bank's monetary policy committee (MPC) will meet on November 6. As recession approaches, the policy bind the MPC found itself in earlier this year - balancing the risk of "embedding" inflation from high food and oil prices versus the dangers of undershooting the 2 per cent target and inducing a recession - seems to have dissolved.
Instead, a new policy dilemma has emerged: how to hit the inflation target without sending sterling into a tailspin and thus generating more inflation in future.
The MPC may also be constrained by increasingly heavy hints that the Government will use public spending and borrowing to boost the economy, in the process suspending the fiscal rules.
- INDEPENDENT
