One of the effects of capital requirements is that they encourage banks to do a lot of things they otherwise might not.
The entire banking sector, for example, is heavily exposed to mortgage risk because capital rules favor mortgages over other types of loans. Similarly, banks bought lots of credit protection from AIG and bond insurers in part because this was a good way of reducing the amount of capital they had to hold against their assets.
Michelle Wiese Bockmann, Liam Vaughan and Ben Moshinsky have a nice story today that illustrates that financial engineering to skirt regulation is still alive and well.CNBC NetNet
Citigroup and Blackstone's Capital Requirement Workaround
John Carney | Senior Editor
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