The higher the proportion of capital contributed by

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Unformatted text preview: the funding of its operations. For example, bank, thrift, and insurance regulators are concerned with the minimum ratio of capital to (risk) assets. The higher the proportion of capital contributed by owners, the greater the protection against insolvency risk to outside liability claimholders such as depositors and insurance policyholders. This is because losses on the asset portfolio due, for example, to the lack of diversification are legally borne by the equity holder first, and only after equity is totally wiped out by outside liability holders.12 Consequently, by varying the required degree of equity capital, FI regulators can directly affect the degree of risk exposure faced by nonequity claimholders in FIs. (See Chapter 20 for more discussion on the role of capital in FIs.) The third layer of protection is the provision of guaranty funds such as the Bank Insurance Fund (BIF) for banks, the Savings Association Insurance Fund (SAIF) for 10 Other regulated firms such as gas and electric utilities also face a complex set of regulations imposing a netregulator...
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