At the most basic level, current credit problems are rooted in questions about the real estate market’s effect on the solvency of the commercial banking system. Now the problems that began in subprime mortgages have spread to other loan types, which increases banks’ exposure to losses in equity capital. Refer to The Brattle Group’s Issue Brief, “Expanding Subprime Mortgage Crisis Increases Litigation Risks,” March 2008.
Because the commercial banking system is the transmission network for federal financial operations, bank solvency is the crucial link between the U.S. Treasury, the Federal Reserve System (the Fed), and the private economy.
Without a solvent banking system, the private sector cannot support its own credit requirements, nor can it provide credit for the needs of the public financial sector. Bank equity capital floats the entire financial system. For this reason, the solvency of the banking system is a matter of intense public policy concern.