It’s the year 2025. Following the passage of Dodd-Frank and related Basel III capital rules, banks did what they were supposed to do: they reduced Shadow Banking risk by cutting their exposures to physical securities lending and repo transactions. But their leveraged clients still wanted to trade, so they turned to the next logical option: OTC and listed derivatives. By 2022, equity and bond market liquidity had gotten so bad that the Basel Committee, now well underway on Basel IV, had to take action.
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