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Deregulation and the Financial Crisis
...In spring 2008, at the request of the Treasury Department, the Fed and the Comptroller of the Currency supervised a special process of stress testing by the nineteen largest U.S. financial institutions (most of which were bank holding companies with large subsidiary banks). Table 1 is taken from a report by the Fed on the stress tests and shows the aggregate projected losses for all nineteen institutions in an economically adverse scenario. For purposes of this discussion, two items in this table stand out--the very large projected losses on first and second lien mortgages and the projected trading and counterparty losses. The former is consistent with the hypothesis advanced at the outset of this Outlook--that the largest banks committed themselves to make large numbers of CRA-qualifying loans in order to gain regulatory approval for expansions in the late 1990s and 2000s. The total projected residential mortgage losses for Bank of America, Citibank, JP Morgan Chase, and Wells Fargo are $167 billion out of a total for all nineteen institutions of $185 billion. The mortgage losses of the other banks in the survey were negligible....