Portfolio mix and net charge offs at large United States commercial banks

Abstract

The United States banking industry experienced a period of poor performance in the late 1980s. Significant problems with loans as reflected in loan loss provisions and net charge offs hampered bank profitability. We examine the effect of portfolio composition on net charge offs at large commercial banks in the late 1980s. Among the various conclusions, one stands out: large banks that hold a higher share of total assets in loans also experience lower net charge offs to total loans, other things being constant. That is, the larger the exposure a bank has in loans relative to other assets, the better its experience with ultimate loan defaults.