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Bank Derivative Activities and Capital

posted 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.



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