Question 10.1: Why do banks and other institutions choose to devote a signi...

Investments perform many different roles that act as a necessary complement to the advantages loans provide. Investments generally have less credit risk than loans, allow the bank or thrift institution to diversify into different localities than most of its loans permit, provide additional liquid reserves in case more cash is needed, provide collateral as called for by law and regulation to back government deposits, help to stabilize bank income over the business cycle, aid banks in reducing their exposure to taxes, and also act as hedge against losses due to changing interest rates.