“Banks don’t go out of business taking risk, they go out of business levering the things that they’re told aren’t risky.” - David Dredge
Bank risk is always about the surprise risk. There was no risk with holding mortgages until there was. There was not risk with holding longer-dated Treasuries until there was. The bank conduct significant due diligence on their loans, yet mistakes are made. One mistake or an isolated mistake is expected, but systemic risk across a section of the entire portfolio is what hurts banks. Systemic risk with leverage matters.
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