Or to put it in the appropriate jargon, the risk weighting for mortgages was - and is - much lower than for corporate loans.
One suggestion is to allow a bank to reduce an asset's risk weighting if it can prove to supervisors its ability to evaluate the credit's specific risks.
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Essentially, banks rate all of their assets based on the likelihood of their default and keep a proscribed amount of capital based on the risk weighting of the asset.
For example a US Treasury would have a very low risk weighting while Mortgage Backed Securities backed by subprime loans would by definition imply a higher risk weighting and thus a higher capital requirement.
They were attracted by the preference shares' combination of a low risk weighting and decent yield, says Ira Jersey of Credit Suisse, but have seen their prices tumble on fears that they will be wiped out if the government moves to prop the agencies up.
It will suggest incorporating a leverage ratio into bank-capital requirements, to supplement the existing risk-weighting of assets.
Banks will be subject to risk-weighting provisions, which will force them to reconsider their decision-making process when it comes to lending.
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Investors fear certain exposures such as sovereign debt and commercial real estate aren't being prudently valued and that banks are manipulating the Basel risk-weighting rules to overstate their capital ratios.
There is no serious discussion of the idea that a low leverage ratio should be the first line of defence, and that the Basel risk-weighting rules should be less prescriptive and more in the form of guidance.
And the US Federal Reserve and bank regulators said that the downgrade won't affect the risk-weighting attached to US sovereign debt for banks - which means that US banks should not be deterred from lending to their government to any great extent.
It was (and is), for example, a chronic failure of international bank regulation that the debt of Italy, Spain, Germany and so on was classified by financial regulators as completely safe and without risk after monetary union - which gave an unhealthy incentive to banks to lend to these governments (in the jargon, the government bonds of these countries were given a zero risk-weighting).
The equal weighting helps mitigate single company risk while allowing the correlation characteristics to remain prominent.
Some providers of single-country ETFs address concentration risk by using a "modified market weighting" to limit their exposure to a country's giant stocks, or simply by focusing on stocks of smaller companies.
Managers with the ability to adapt to change, with the ability to manage portfolio risk factors such as yield, duration, allocation weighting, and credit quality, can find success in multiple environments.
Now they have the same risk, so now I can look at 500 stocks that represent the large-cap market, all making money, and every single stock in there has the weighting based on their volatility, so every stock is equalized in terms of risk.
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