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

Year C&I Loans Consumer Loans Total Loans 2012 0.0080 0.0165 0.0075 2011 0.0088 0.0183 0.0085 2010 0.0100 0.0210 0.0100 2009 0.0120 0.0255 0.0125 2008 0.0104 0.0219 0.0105 2007 0.0084 0.0174 0.0080 2006 0.0072 0.0147 0.0065 2005 0.0080 0.0165 0.0075 2004 0.0096 0.0201 0.0095 2003 0.0144 0.0309 0.0155 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 X C loss rate in the commercial sector, X h loss rate in the consumer (household) sector, and X L loss rate for its total loan portfolio.
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?
In which sector should the bank limit its loans and why? LO.1