The U.S. financial system still needs at least $1 trillion to $1.2 trillion of tangible common equity to restore confidence and improve liquidity in the credit markets, Friedman Billings Ramsey analyst Paul Miller said.

Eight financial companies -- Citigroup Inc, Morgan Stanley, Goldman Sachs Group Inc, Wells Fargo & Co, JPMorgan Chase & Co, American International Group Inc, Bank of America Corp and GE Financial -- are in greatest need of capital, he said.

"Debt or TARP capital is not true capital. Long-term debt financing is not the solution. Only injections of true tangible common equity will solve the current crisis," he said in a note dated November 19.

Currently, the U.S. financial system has $37 trillion of debt outstanding, he noted.

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Combined, these eight companies have roughly $12.2 trillion of assets and only $406 billion of tangible common capital, or just 3.4 percent, the analyst said in his note to clients.

Miller said these institutions need somewhere between $1 trillion and $1.2trillion of capital to put their balance sheets back on solid ground and begin to extend credit again, given their dependence on short-term funding and the illiquid nature of their asset bases.

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