Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

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Sun, 04 Oct 2009

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.

Posted at 13:56 on Sun, 04 Oct 2009     View/Post Comments (0)     permanent link