Before revision:  The second is Basle II , which also imposes interest rate spreads on loans and haircuts on collateral, and the third is a hypothetical alternative in which banks perfectly hedge all of their leverage-induced risk with options that are paid for by the funds .
After revision:  The second is Basle II and the third is a hypothetical alternative in which banks perfectly hedge all of their leverage-induced risk with options that are paid for by the funds .