• Bank losses and write-downs continue to mount and with unemployment on the rise, loan losses are likely to increase further. The IMF has estimated that total losses in the banking system could amount to USD2,200bn, implying that only half of the forecast losses have surfaced so far. While losses in themselves are hampering the banks' capital cushion, uncertainty regarding the size and distribution of such losses works as a roadblock to the normal functioning of credit markets. Government intervention should therefore be aimed not only at recapitalizing the banks but also at removing uncertainty from banks' balance sheets.

• The Financial Stability Plan (FSP) announced by US Treasury Secretary, Timothy Geithner on 10 February addresses these issues by setting up a USD500bn Private-Public Investment Fund, which should catalyze private sector investments in distressed assets, combined with a Financial Stability Trust, which will receive convertible preferred shares from banks that receive new capital injections. However, the measures will take time to implement as the banking system will first have to undergo thorough stress tests to assess the health of individual banks. In addition, the terms on which new capital injections are made will be stricter than under the TARP.

• Furthermore, the plan includes an expansion of the Fed's TALF program to revive consumer credit. The program has been expanded to include commercial mortgage-backed securities, private label residential mortgage-backed securities and other asset-backed securities. The size of the program could be increased from the current USD200bn to as much as USD1,000bn.

• So far, the plan is short on detail, especially on the Private-Public Investment Fund, and it remains to be seen whether the announced measures will be enough to restore confidence and lending in the banking system. So far equity markets have been doubtful about the plan, with financials knocked back to last week's levels. In our view, the main drawback of the plan is that, apart from the expansion of the TALF, it will take time to implement. However, once it is effectuated, it could remove a great deal of uncertainty about the health of individual banks.