What do banks lose money on during crises? Household loans or commercial loans?

Norges Bank econs Kasper Kragh-Sørensen and Haakon Solheim have this interesting piece on the topic.

They do a historical analysis of select episodes of financial crisis to answer this question. They say in most crisis banks lose money on commercial loans:

We look at a wide range of national and international crises to identify banks’ exposures to losses during banking crises. We find that banks generally sustain greater losses on corporate loans than on household loans. Even after sharp falls in house prices, losses on household loans were often moderate. The most prominent exception is the losses incurred in US banks during the 2008 financial crisis. In most of the crises we study, the main cause of bank losses appears to have been property-related corporate lending, particularly commercial property loans.

Households are usually risk averse and take loans with care. This is not the same with corporates where Minsky rules the roost. The mantra usually is – Borrow money till it lasts/keep dancing to the music till it lasts..

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: