Beyond Sub-Prime, by John Hussman

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Remember also that banks operate on a ratio of about $10 of assets (generally loans outstanding) per $1 of shareholder equity capital. So a 1% loss of existing loans can wipe out about 10% of shareholder capital. Since banks are required to hold such capital against their loan portfolio, wiping out capital also wipes out part of their ability to originate new loans. Importantly, bank capital requirements are a separate constraint from the reserve requirements placed on a bank's demand deposits.

Note the difference. Reserve requirements apply to the liabilities of a bank (basically customer deposits), while capital requirements apply to the assets of a bank. If banks have insufficient reserves to meet, say, the demand of customers for cash, the Fed can intervene by buying up Treasury securities from banks and paying with reserves (this is what the FOMC really does when we talk about a “Fed rate cut”). Banks can then meet their obligations to depositors without having to call in loans. This is a legitimate “lender of the last resort” function for which the Fed actually does have a critical role (as I've noted elsewhere, except during banking crises, the Fed's powers to affect the economy are largely imagined). While some individual banks may be at greater risk than others, we should not be concerned about a general banking failure, precisely because of the Fed's ability to act as a lender of last resort.
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