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Specifically, because bond fund managers rotate in and out of bonds as rates climb, the risk of capital losses never, ever goes away.
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They cannot bear to risk such capital losses again, so they stay away from equities and over-weight their portfolios with Treasury bonds and other conventional fixed income securities where they naively believe they cannot lose principal.
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And because the EFSF bears the first losses, its capital is at greater risk of being wiped out than under a loan programme.
ECONOMIST: Economic crisis
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First, they want to build statistical models mapping the severity and frequency of past operational risk losses and use this to judge the amount of the bank's capital at risk from operational failures in the future.
ECONOMIST: Risk management
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In the real world, bankers must put their own capital at risk, and governments do not cover all losses.
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Tilton explains that she holds the equity in all of her Zohar CLOs and is at risk of losing capital if her bonds sustain large losses.
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Having incurred smaller losses than rivals, it is still prepared to deploy risk capital where others fear to tread.
ECONOMIST: American finance
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Most notably, the SEC has the power to monitor whether the investment banks had adequate capital relative to their trading positions and balance sheets and the proper risk management systems to prevent catastrophic losses.
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Higher capital requirements would put more of the shareholders' money at risk and, crucially, enable banks to absorb more losses in bad times.
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To put it simply, as long as investment yields exceed underwriting losses, the way to maximise shareholder value is to underwrite as much risk as possible with as little capital as possible.
ECONOMIST: Capital punishment
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The stampede was partly an attempt to reduce the amount of capital banks needed to reserve against possible losses on such bonds, as well as an effort to avoid the wrath of risk-averse investors, executives say.
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