The Impact of LIBOR Linked Borrowing to Cover Venture Bank Investment Loans Creates a New Systemic Risk

Brian P. Hanley

Papers from arXiv.org

Abstract: A scenario in which regulators take the drastic step of requiring coverage of all venture bank investment loans using interbank borrowed funds is considered. In this scenario, a minimal amount of default insurance is used, such that Tier 1 and 2 capital requirements are still met. To do this, the default insurance percentage on all investment loans is cut to 3.88%, although the minimum is 2.88%. Results: For a portfolio of 1.31X (ten year total conventional return) or better, at interest rates of 2% or better, the venture bank survives and can have excellent returns. For a portfolio of 1.5X (ten year total conventional return) the bank can have extraordinary returns below 1.5% interest and survive up to 3%. interest. However, if returns fall, or interest rates rise, then venture banks go underwater quite rapidly. Conclusion: Using LIBOR funds limits profitability, and damages stability of the bank, with no visible benefit to any party, thus creating a new systemic risk to the banking system.

Date: 2018-08, Revised 2019-12
New Economics Papers: this item is included in nep-ias and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1809.01987 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1809.01987

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().