The U.S. government is likely going to have to pump a huge quantity of capital into the country’s large banks, BCA Research suggests.

In a research note, BCA says that it is difficult to estimate how much capital the government will need to inject into the financial sector under the Capital Assistance Program, “but the number will likely be substantial” it notes.

The firm says that when FDIC chairman, Sheila Bair, says that U.S. banks are well capitalized, “she must be referring to the multitude of small banks, rather than large banks.”

The top 20 financial institutions have a capital cushion of only 3.4% (defined as tangible capital/total assets), it says. “In other words, it would require a writedown of total assets of only 3%-4% to wipe out all tangible capital for the largest banks.”

“The FDIC data on the broader banking universe confirms that the capital cushion of large banks is much less than their smaller counterparts. Moreover, toxic assets are concentrated in large financial institutions,” it reports. Level 3 assets represent 5.5% of total assets and are 62% larger than tangible capital, for the top 20 institutions, it says.

“The implication is that the stress tests will likely reveal that many of these institutions are not properly capitalized even in the base-case economic scenario (not to mention the worst-case scenario),” it concludes. “We suspect that the authorities are publicly downplaying the amount of recapitalization that is likely to be required, but behind closed doors they must realize that the CAP will be a large sinkhole for taxpayer funds.”

“The final cost of the bailout plan announced last week will be dramatic. Nonetheless, it is a critical element in ending the financial crisis and stabilizing the economy,” it adds.

IE