4: How The Current System Failed And The Need For See-Through Leverage (STL)
- The drive of banks to optimise short-term return on capital (ROC) for equity investors motivated the creation of the shadow banking system.
- Basel II addressed some of the flaws of Basel I by making capital requirements more sensitive to expected losses, while increasing risk due to leverage.
- New structures of the shadow banking system in combination with Basel regulations allowed a massive drop in required capital for the same level of risk.
- The combination of ratings, regulations and financial engineering facilitated a massive increase in leverage.
- A new language of risk – see-through leverage or the family of STL risk indices – is introduced, ...
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