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The Basel capital framework plays an important role in risk management by linking a bank's minimum capital requirements … to the riskiness of its assets. Nevertheless, the risk estimates underlying these calculations may be imperfect, and it … appears that a cyclical bias in measures of risk-adjusted capital contributed to procyclical increases in global leverage …
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Excerpts from the 2004 book, “Too Big To Fail: The Hazards of Bank Bailouts,” by Gary H. Stern and Ron J. Feldman.
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In this essay, we first briefly explain why the government’s response to the 2007–08 financial turmoil, although justified, expanded the safety net and exacerbated the existing too big to fail problem.
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