Banks must "more than double profits" to meet capital requirements

We knew that the banks were under-capitalized — on purpose, it seems; why let good chips sit idle when the dice are coming out. The problem is, how much are they under-capitalized, relative to the coming capital requirements?
UK Telegraph has the answer:

Banks across Europe and North America must more than double their profits by 2015 if they are to meet the capital requirements likely to be imposed on them over the next few years, experts have warned.

Institutions need to increase profits by about $350bn (£221bn), according to management consultancy McKinsey, which said banks were facing "considerably deeper" challenges than the sovereign debt crisis currently engulfing the sector.

McKinsey said increased profitability would ensure banks produced returns that met their current cost of equity, while covering additional capital requirements under Basell III of up to $1.5 trillion. However, it warned additional surcharges for Systemically Important Financial Institutions, could make the gap even greater.

"This return gap is enormous", said Stefano Visalli, director at McKinsey. "It is bigger than the total profits of the global pharmaceutical and automotive industries put together. To achieve this will require a radical break with past trends for an industry that has never before decreased costs in absolute terms; in the next years it may need to reduce them by 15pc-25pc as well as increasing revenues."

The straits seem dire, and the problem is both in Europe and the U.S. Did you catch the "decrease costs" part? What are costs in banking? My guess is salaries, bonuses, and fees (esp. legal fees).

After all, banks don't make anything, and they certainly don't have inventory, in the auto-parts sense. Bank inventory is stuff like computer lists of mortgage bundles they've bought, to be repackaged, tranched and sold. Certainly no freight and storage costs, unless Wall Street's electrons are as expensive as their lunches. So, salaries and bonuses — the invisible hand may taketh after all.

According to the article, "structural weaknesses exist across the industry." This is not good, since in the U.S. at least, the taxpayer is on the hook for bank losses (both legally in some cases, and de facto in others). In Europe it's roughly the same, though Iceland let its weak banks fail to avoid putting taxpayers on the hook. (How'd that work out? Very nicely, thank you very much.)

To bail them out, or not to bail them out? That is the question, should it come to that. It's definitely "double toil and trouble" time by the looks of it. It would be nice if some consumer demand showed up to boost economic activity. Perhaps Obama's jobs bill will pass — that would make a nice start (so long as he keeps his mitts off the safety net).