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Critique of a Bank's Argument Against Capital Buffers
A large commercial bank argues that its highly diversified loan portfolio, spread across thousands of different borrowers in various industries, effectively eliminates the risk of significant financial loss. Therefore, the bank's management contends that it should be permitted to operate with a very small amount of its own equity capital relative to its total assets. Critically evaluate this argument. In your response, explain the fundamental reason why regulators would likely reject this position and insist on the bank holding a substantial capital buffer.
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