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Financial markets are still turbulent, but there are signs that the waters are becoming a little calmer. Credit spreads remain unusually wide, however, and this has raised the cost of borrowing to individuals and corporations. The financial sector has been more affected by the problems than nonfinancial companies. The losses in mortgage-related securities have eroded capitalization of the banks. Although banks have been able to replace that capital more easily than many feared, they still need to add more, both to replace the capital lost and to increase their capitalization to allow expansion of their loan portfolios. The weakness in securitization markets means that bank must operate in a more old-fashioned manner, making loans and taking in deposits. That requires a larger capital base, but it could be more profitable in the long run, since it reduces competition from non-banks.

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