With bankers facing projected credit losses of $670 billion over the next four years, government capital investments of $250 billion would keep them from shrinking their balance sheets in the next two years but would not "spur credit creation," analysts with Barclays PLC's investment bank in New York said.

Because of the dysfunction in the bond markets, the analysts also forecast the "rationing of bank capital to the highest-quality borrowers and a consequent increase in high-yield default rates."

"If the government is counting on banks to spur lending, that does not seem likely in the next couple of years. Rather, banks are likely to participate in credit creation at a time when the economy is (hopefully) already on the track to recovery," they wrote.

In a report issued last week, the analysts assumed bankers would be conservative and maintain Tier 1 capital ratios 50 basis points higher than average during the next two years. Government pressure to trim such a cushion could change the picture, propelling asset growth of 9% next year, they wrote, compared with typical growth of 6% to 8%.

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