The banking system needs another $500 billion to survive beyond the $700 billion rescue plan being contemplated by Congress, said Pimco founder Bill Gross.

Gross said on CNBC that the government bailout plan will help free up bank balance sheets so they can start lending again, but will provide only about $50 billion in real capital to the system.

"The plan goes far but it doesn't go far enough in terms of recapitalization," he said. "The banking system and the investment banking system in total really requires about $500 billion more. Where that comes from is still up in the air."

The Federal Reserve will need to step in to quell fears of counterparty risk—the worry that one partner in a deal won't hold up its end--and provide assurance that it will be a clearinghouse to make sure transactions get done, Gross said.