recovers. moreover, as banks book profits, deferred tax assets will shrink, reducing the magnitude of these future deductions from common equity. finally, it is important to note the significant potential earnings power of large u. s. banks, which have historically tended to have higher rates of return on their average assets relative to many of their foreign counterparts. banks that currently are short of the 2019 standard could retain these future earnings to build up their capital ratios. equity analysts project that the 20 largest u. s. banks will earn more than $ 80 billion in 2010, and consensus estimates expect that figure will increase to around $ 110 billion in 2011. of course, because these estimates are dependent on an economy that continues to recover, we need to be cautious about relying entirely on as - yet - unrealized earnings as the primary means to meet the higher capital standards. so what about the long - run consequences? it would be prudent to assume that requiring banks to hold more capital and higher cost capital is likely to result in somewhat higher lending spreads. bank managements will need to generate sufficient income to support the rate of return on equity at a sufficient high level so banks can continue to attract capital from investors. of critical importance is whether the increase in lending spreads is likely to be large or not. those who argue that the new capital standards will necessitate a large increase in lending spreads generally start with a rigid set of assumptions. these include : 1 ) return on bank equity is unchanged ; 2 ) the increase in bank equity does not affect funding costs ; and 3 ) there is no change in the banks ’ book of business or on banks ’ ability and willingness to adjust other expenses, such as compensation. such rigid assumptions are unrealistic. this is particularly important because each assumption is likely to be wrong in the direction that reduces the impact on lending margins. first, the necessary return on equity that banks will have to generate to be able to attract capital will likely fall. because banks with more capital should be safer and have less volatile earnings, investors should demand a lower return on equity than before. second, by increasing the soundness of banks, an increase in bank equity, everything else equal, should also reduce funding costs. third, higher bank lending spreads almost certainly will push some activity into the capital markets, constraining the magnitude of the rise in total lending costs. finally, banks may be forced via competitive pressures to lower their compensation levels. by cutting compensation costs

to achieve real benefits, i believe that concerns over the costs are exaggerated. turning first to the issue of the transition to the new regime, we cannot precisely predict the size of the adjustment costs as they will depend importantly on the strategies bank managers employ to meet the new requirements, and how bank investors respond to these actions. nonetheless, i believe the transition is likely to be quite manageable for three reasons. first, many of the large u. s. banks already have large amounts of tangible common equity. in part, this represents the regulatory response during the crisis. the supervisory capital assessment program ( scap ) in 2009 required the large banks to have a capital buffer consistent with achieving a tier i common ratio of 4 percent under a stress environment considerably worse than what was anticipated ( or did, in fact, occur ). banks that fell short of this were forced to raise additional capital. on top of this, troubled asset relief program ( tarp ) repayment terms provided strong incentives for banks to issue common equity to repay the tarp preferred stock. in addition, several banks converted preferred stock into common equity. roughly speaking, the 19 banks subject to the scap generated more than $ 100 billion of common equity via share issuance and $ 80 billion via conversion of preferred stock into common equity in 2009. second, as noted above, the standards are being phased in slowly. for example, in 2013, the tangible common equity standard will be only 3. 5 percent. in 2013, there will be no conservation buffer requirement and banks will still get credit for items that will ultimately be deducted from common equity, such as deferred tax assets. the federal reserve, as the consolidated supervisor of the largest and most complex banking companies, does not expect these banks to meet the fully phased in standards today. instead, the federal reserve will require firms to develop an adequate capital plan to meet the basel iii requirements as they become effective and will track progress toward meeting those plans over time. third, banks have many ways they can adjust their business models to meet the new standards as they are phased in. many of these changes can occur without any risk of disruption to the flow of credit to households and business. for instance, banks can sell nonstrategic assets to investors and can modify their minority investments in non - consolidated interests. low - quality legacy assets, such as subprime mortgage loans and second mortgages, will mature and run off. risk - weighted assets will tend to fall as the economy