First, we stress the fact that on the asset side, banks hold not only loans, but like their shadowbanking counterparts, they also hold securities, often in very substantial amounts. Moreover, these securities holdings have a particular pattern.
Banks tend to stay away from the safest and most liquid securities, such as Treasury securities, and instead concentrate their holdings in securities that are less liquid and whose market prices are more volatile, including agency mortgage-backed securities (MBS), collateralized mortgage obligations (CMOs), asset-backed securities and corporate bonds. We argue that this pattern is an important clue to the business of banking more generally.