In the short term, a critical situation is a particularly inopportune time for banks to raise capital in the markets, at the very time this capital would be needed to absorb losses. Individual banks would then have to shrink their balance sheets in order to fulfil the increased capital requirements.
They would have to sell assets, scale back existing lines of credit to the real economy, or cut back on the issuance of new loans. If fire sales send securities or real estate prices plummeting, this can also take its toll on institutions for which loan losses were barely an issue to begin with.