Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Bank Losses: Securities versus loans

I have been arguing for some time now (for example, here)
that the financial crisis in the US is looking more and more like an
old fashioned banking crisis rather than a problem in the securities
markets. The IMF Global
Financial Stability Report
released earlier this week provides
strong evidence for this.

Table 1.2 in Chapter 1 shows that out of the trillion dollar losses
projected for US banks, 64% would come from loans and only 36% from
securities. The losses on loans are estimated as 8.1% of the total
loans held by the banks while the losses on securities are 8.2% of the
securities holding. These practically identical loss rates demolish
the idea that we would not have had a crisis if the US had boring
banks which just took deposits and made loans.

For the world as a whole, the loss rate on securities (5.9%) is
significantly higher than loans (4.7%). Despite that, 67% of the $2.8
trillion losses come from loans and only 33% from securities.

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