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A scenario in which regulators take the drastic step of requiring coverage ofall venture bank investment loans using interbank borrowed funds is considered.In this scenario, a minimal amount of default insurance is used, such that Tier1 and 2 capital requirements are still met. To do this, the default insurancepercentage on all investment loans is cut to 3.88%, although the minimum is2.88%. Results: For a portfolio of 1.31X (ten year total conventional return)or better, at interest rates of 2% or better, the venture bank survives and canhave excellent returns. For a portfolio of 1.5X (ten year total conventionalreturn) the bank can have extraordinary returns below 1.5% interest and surviveup to 3%. interest. However, if returns fall, or interest rates rise, thenventure banks go underwater quite rapidly. Conclusion: Using LIBOR funds limitsprofitability, and damages stability of the bank, with no visible benefit toany party, thus creating a new systemic risk to the banking system.

The Impact of LIBOR Linked Borrowing to Cover Venture Bank Investment Loans Creates a New Systemic Risk