Tuesday, January 19, 2010

Repeat After Me: Lending is Risky

It's amzing to me that people are still referring to commercial banks and thrifts as "safe and boring operations," even though 140 commercial banks/thrifts failed in 2009, and the number of banks on the FDIC's "problem list" has risen to a whopping 552. Commercial banking is inherently risky — in all loans, there's a risk that the borrower won't pay you back. Just ask all the commercial banks and thrifts that lent most of their deposits out in the form of commercial real estate loans.

19 comments:

Luis Enrique said...

how would one quantify the risk of "safe and boring" versus the risk of whatever not safe and boring is? Does anybody know of anybody who has done it? How often to investment banks bankrupt themselves relative to commercial lenders?

then again, perhaps the safe and boring refers not to the risks to the bank itself, but to what happens when they go bust? Are the consequences of a commercial lender failing more safe and boring then when an investment bank goes under?

Anonymous said...

It's not risky when I promise to pay!

Cetamua said...
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Cetamua said...
This comment has been removed by the author.
Anonymous said...

Luis Enrique:
Are the consequences of a commercial lender failing more safe and boring then when an investment bank goes under?

I don't think so...remember that commercial banks tend to be deposit funded meaning by unsophisticated investors - if they go bust it can be painful for society at large. Also, look at the great depression to have an idea of how devastating comnmercial bank failures can be. T

EOD is right here - it takes someone really financially ignorant , like a journalist or a politican o claim that lending is "boring!"

Anonymous said...

I read the article. Its so stupid its not funny. What I don't get is, how in the world do you get (paid) to write about banking in a national publication when you clearly are PERFECTLY CLUELESS about what investment AND commerical banking are ?! Does anyone need to remind this person of the S&L crisis, or about another 1000 crises caused by commercial banking activities ?

Perhaps, its time to think about limiting toxic journalists as well as toxic assets.

rufus mcbufus said...
This comment has been removed by the author.
rufus mcbufus said...

Yes, absolutely! Lending is risky. Which is precisely and exactly why you should never ever ever ever never ever ever be bailed out or "made whole" when your risky-ass deal blows up. And yet, Economics of Contempt is always advocating keeping the big boys whole. What gives with the hypocrisy?
-rufus

Anonymous said...

rufus when did he advocate that?

Danny

Barry said...

"It's amzing to me that people are still referring to commercial banks and thrifts as "safe and boring operations," "

This indicates a lack of rigor. When most small banks fail, it's a minor deal, with local and generally temporary effects. When the big boys of Wall St fail (and start dominoing each other), that's a different story. That can trash the world economy.

Eggs in a very few, very large baskets (which are tied together), or eggs in many, many smaller baskets.


Biiiiiiiiiiiiiig difference.

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