In 1984 Fed chair Paul Volcker proposed new rules to set minimum standards for bank capital, hoping thereby to prevent undercutting of relatively robust banks by less well-capitalized competitors, notably from Japan. For the resilience of a bank in the face of losses on its loan book, capital is the crucial criterion. The more capital a bank has, the more it is able to absorb losses. However, the larger a bank’s book of loans relative to its capital, the higher the rate of return it will be able to offer investors. That was the point of the elaborate legal structures designed to hold
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