The report, Basel II – Impact on Spreads, argues that banks are likely to increase their bondholdings as a result of their assumed rate of return increasing under Basel II. This is because Basel II links economic risk to the amount of regulatory capital that needs to be set aside to cover it. Banks will be more likely to buy highly rated bonds than sub-investment grade, and more likely to buy fixed-income assets in general than equities.
The assumed rate of return will increase on large sect
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