If the Federal Reserve Bank of New York requires mortgage originators to repurchase mortgages acquired through the bailouts of companies like American International Group and Bear Stearns, as it said it might, banks could face weaker earnings and reduced lending capacity as a result.

Second-quarter earnings showed that recovery is on its way for banks, with, for example, Morgan Stanley beating analysts' forecasts. But there's still some pressure on the industry.

The most obvious hurdle is to comply with the financial overhaul and more specifically with the Volcker rule, asking banks to get rid of their proprietary trading operations, which will prompt some revenue losses.

But if banks have to repurchase faulty mortgages held within non-agency residential mortgage-backed securities and collateralized debt obligations, their recovery could be hampered further.

Of course, as we pointed out last week, there's some doubt about the link between banks' earnings and lending capacity.

But in the current environment, it's hard to see how banks could lend more while facing fresh losses.  Most major mortgage originators have established reserves for mortgage repurchases. but these amounts haven't been disclosed and the volume of repurchase requests is also growing, increasing repurchase expenses banks have to record on financial statements.

Some of the banks exposed include Bank of America, which acquired Countrywide, and JPMorgan, which acquired Washington Mutual

"In the end, we expect that the cost for banks will be substantial," said Moody's Investors Service in a report Monday. The credit ratings agency estimates that repurchase expenses at US banks in aggregate are currently running  at several billion dollars a quarter and said that as of June 30, the amount of reported repurchase reserves outstanding at the four largest US banks totaled more than $8 billion.

The need to continue to build reserves will continue to mount. In turn, it will curb banks' ability to lend and to bolster regulatory capital, continuing to be a drag on earnings for at least another year if not longer. With banks reporting weak loan demand, how much of an effect that might have on the economy is unclear. But no one should count on the industry to be the engine of this recovery.