(Warnings to be ignored) The market for interest-rate change is another privileged playground. Banks just pay a low, short-term floating rate and get a high, fixed one. Most of the top 20 American banks receive at least 10% of their profits from this increase, and for J.P. Morgan Chase, it was an astounding 33% last year. (Warnings to be ignored) as well as civilizing their interpretation of the economic tealeaves, banks have become skillful at dispersing the risk of their loans. There has been a pace change in risk management. The expansion over the past decade of markets for dispersing risk among institutions has been extraordinary. For instance, most mortgages are securitized taking them off the books of the originating banks. In the syndicated-loan market, in which one bank or a small group gets together a large number of lenders, which might include pension funds and insurers as well as other banks, about $2 trillion was devoted in 2001, more than twice the amount in the early 1990s. (Just Deserts?)

The worth of loans given to other financial institutions on the secondary market grew fivefold in the 1990s, to about $100 billion. But the most striking development has been the increase of credit derivatives, mainly credit-default swaps, which have been purchased tremendously by big banks. In the third quarter of last year, American banks had more than $400 billion-worth of credit-default insurance; on the other side, they were guarantors of almost $350 billion-worth. This market hardly survived until the mid-1990s. Thus the survival of the credit-default swap market may have aided to raise the supply of corporate loans: banks are more eager to lend if they know that they can buy insurance against default. Alterations in guideline and legislation have also left banks with thicker cushions against economic swelling. They are less exposed to local economic problems, as the withdrawal of laws limiting banks' movements across state borders has permitted them to cover bigger areas. Improved profitability and strict supervision have lent a hand too. One aspect is the Basel accord. American banks capital is at present 13% of risk-weighted assets increase from 10% in 1990. The Basel bare minimum is of 8%. Domestic regulations added, among other things, necessities for the banks equity-to-assets ratio: if this drops too far, the FDIC, which insures bank deposits, must tread in. (Just Deserts?)

Banks have enhanced their risk management partially by handing over credit and market risks on to other parts of the financial system, such as other banks, insurers, pension funds and hedge funds. These beneficiaries have been completely happy to acknowledge those risks, and many of them even realized what they were doing. Again inexpensive money triggered an explosion in personal borrowing, mainly against...

Householders soared in joy at the option to refinance indeed; to boost their unpaid amounts assisted by America's system of permitting homeowners to convert their long-term fixed-rate loans early without fine. Households' mortgage arrears in the last quarter of the year was $6.8 trillion, 27% up on two years earlier, though mortgage lending decelerated in the second half of 2003. The current drop in bond yields may give mortgages a new encouragement. The explosion in mortgages and consumer credit has been given as a bonanza for banks supplying chiefly for retail customers. For instance, in 2001, among America's 50 biggest banks that got most of their profits from loan on housing property and consumer banking showed clearly elevated profits on equity than others- on average, they overcame others by three percentage points. (Just Deserts?)
In addition, banks have more liberty to put forward nontraditional products these days than they did a decade ago. Furthermore, government deregulation has exposed the banking industry to earlier unfelt market forces. Thus, banks confront severe competition from non-bank companies and other banks that can go into their field. With high pressure, banks have a bigger motivation to utilize new sources of revenue. These developments have been connected with record profits and symbolize the utilization of new technologies and legal systems. Moreover, there is the prospective that adding together fee income into the mix will decrease the threat of the bank by improving its diversification. (Noninterest income: A potential for profits, risk reduction and some exaggerated claims)