Bankruptcy

Bank Derivative Activities and Capital

By Adam Levitin

We've heard a lot in recent months about bank derivative activities. What's striking is how rapidly they grew without capital growing to cover potential losses. Here's a time series graph of bank derivative exposures (all types of derivates, including credit, forex, and interest rate; the number reflects maximum possible exposure everything went wrong), bank Tier 1 (core) capital, and the ratio of the two. The data comes from FDIC Statistics on Depositary Institutions. I have excluded federal thrifts from the graph because they report Tier 1 capital, but not derivatives.

Full post as published by Credit Slips on October 25, 2008 (boomark / email).