I couldn't be more in agreement with Minyan Peter when he points out that, ultimately, a bank’s access to cheap sources of funding is perhaps the key to its viability, more so than its capital ratio. Banks make money by gathering deposits on the cheap and lending dear. If banks are not able to access cheap sources of funding, their net-interest margins narrow and they become unprofitable. The value of a banking franchise stems from its ability to generate positive future cash flow, not from its accounting-book value.

Where I respectfully differ with Minyan Peter is in his assessment that there's substantial systemic risk to banks’ deposit bases or their funding costs. First, I don't believe that there is a substantial risk of a systemic run on deposits. The public perceives FDIC guarantees as solid, and I don't foresee a change in these perceptions any time soon.

Second, the Fed has explicitly said that they will provide unlimited cheep funding for banks that experience liquidity/funding problems. When people realize that for every dollar that panicky depositors withdraw from a bank, the Fed will replace it with one or more dollars at an equal or lower cost, few depositors will bother to withdraw. As long as the Fed continues to act as the “depositor of last resort,” there's very little risk that banks will lose their deposits, or that their funding costs will increase.

Actually, I believe the funding issue Minyan Peter brings up could very well be a substantial source of upside for banks in the next few years. Funding rates from deposits and other sources are extremely low and are likely to remain low for a very long time, while lending rates haven't come down nearly as much.

Thus, banks will probably be making a killing on spreads for a long time - which implies historically high levels of net-interest margins and profitability. Banks, at these funding rates, will be cash-generating machines and this situation will accelerate balance sheet repair.

Indeed, the Fed may eventually commit to keeping some special longer term funding windows open to help the banks repair their balance sheets. This is precisely what happened in several countries that had banking crises, and it allowed banks to get back on their feet.

As long as the Fed stays behind the banks as a guarantor of cheap funding -- and there's every indication they will -- then the profitability assumptions in my model of bank equity recovery may be too modest. There's a substantial possibility that banks will experience rip-roaring profitability in the next few years on their performing assets, and that they'll be able to repair their balance sheets faster than anybody thinks.

Bernanke has spoken: The Fed's got banks' backs. And it generally doesn't pay to fight the Fed.