Over the past 10 years, a bank has experienced the following loan losses on its C&I loans, consumer loans, and total loan portfolio.

Using regression analysis on these historical loan losses, the bank has estimated the following:
XC = 0.002 + 0.8XL and Xh = 0.003 + 1.8XL where XC = loss rate in the commercial sector, Xh = loss rate in the consumer (household) sector, XL = loss rate for its total loan portfolio.
a. If the bank€™s total loan loss rates increase by 10 percent, what are the expected loss rate increases in the commercial and consumer sectors?
b. In which sector should the bank limit its loans and why?

Transcribed Image Text:

5 505555 8 530594751 17460 681 211123 2 42064 878 9 & 0000000000 543210987 Y 2222222222