  A scenario in which regulators take the drastic step of requiring coverage of
all venture bank investment loans using interbank borrowed funds is considered.
In this scenario, a minimal amount of default insurance is used, such that Tier
1 and 2 capital requirements are still met. To do this, the default insurance
percentage on all investment loans is cut to 3.88%, although the minimum is
2.88%. 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 can
have excellent returns. For a portfolio of 1.5X (ten year total conventional
return) the bank can have extraordinary returns below 1.5% interest and survive
up to 3%. interest. However, if returns fall, or interest rates rise, then
venture banks go underwater quite rapidly. Conclusion: Using LIBOR funds limits
profitability, and damages stability of the bank, with no visible benefit to
any party, thus creating a new systemic risk to the banking system.

Risk Management;General Finance