They assume that leveraged financial institutions have a  BIS Review 25/2008  3  target 10-to-1 leverage ratio, so that each dollar of a loss of capital will lead to a contraction of their balance sheet, and hence lending, by $ Assuming that institutions can make up half of their $ billion mortgage credit losses by raising new capital, leaving them with a decline of capital of around $ billion, they come up with a contraction of domestic lending near $ trillion.
Actually, the authors' calculation is a bit more complicated than my simple characterization. They assume that the target leverage of banks and others decreases, as it has in previous lending cycles, but they also net out reduced lending from one leveraged entity to another. On balance, under their baseline scenario, they predict that lending to the unleveraged sector will decline by about $ billion.