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Discounting [31]

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Bullet points include: Proximate cause of many of the problems in the 2007-09 credit crisis Firms were unable to offload illiquid (‘toxic’) assets to meet funding requirements Underemphasised in Basel II Even by 2007 the UK FSA and others had realised that: Banks’ maturity transformation activities make them inherently susceptible to liquidity risk [N.B. G-SII debate: do insurers have similar susceptibilities?] Adequately capitalised firms may not always be able to obtain the liquidity that they require when there are market failures Managing liquidity risk involves trade-offs Liquidity risk can grow in severity very rapidly and is dependent on general liquidity climate (e.g. extent of general liquidity ‘hoarding’) as well as firm-specific features

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