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ERM frameworks [17]

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Bullet points include: Regulators wanted to make capital requirements more sensitive to risk. To reduce incentive to arbitrage. Complicated, so took 10 years to devise and introduce. Pre Basel II had to hold uniform 8% capital against all non-mortgage, non-bank private sector loans. Late 1990’s, US and European banks started making greater use of structured products and credit derivatives, partly to reduce capital requirements (‘capital arbitrage’)

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