Tuesday, May 12, 2009

Bank Loan Loss Rate will be MUCH HIGHER than During the Great Depresion


During the depths of the Great Depression, the loss rate which banks suffered on their loans climbed as high as 3.4% (it is normally well under 2.0%).

Last month, banking analyst Mike Mayo predicted that loan loss rates could go as high as 5.5%, which is substantially higher than during the 1930s.

But the Federal Reserve's more adverse scenario for the stress tests - which everyone knows is too rosy concerning most of its assumptions - predicts a loan loss rate of 9.1%, nearly three times higher than during the 30s.

As US News and World Report wrote yesterday:

For most of the past 50 years, the loss rate on all bank loans has stayed well under 2 percent. The Fed estimates that over the next two years the loss rate could reach 9.1 percent. You know all those historical comparisons that end with "the worst since the Great Depression"? Well, 9.1 percent would be EVEN WORSE than during the 1930s. Still looking forward to a soft landing or a quick recovery?

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2 comments:

  1. lånMay 23, 2009 at 4:38 AM

    Quite interesting and informative. Thanks for sharing.

    ReplyDelete
  2. AnonymousJune 3, 2009 at 6:18 AM

    The 9,1% loss rate represents a two-year cumulative loss rate, whereas the 3,4% from the Great Depression most likely represents an annual loss rate.
    The difference is therefore by far not as big as you suggest

    ReplyDelete

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