It’s the risk-weights, stupid!

Sir what detonated this crisis? The fact that because of the risk-weights the banks needed only to hold 20% of the basic capital requirements when investing in triple-A rated securities backed by the lousily awarded mortgages to the subprime sector. Would it have happened if the risk-weight for those investments had been 100%? Of course not!

In this respect when one, on September 17, 2010, more than two years after the crisis exploded, reads the chairman of the Financial Stability Board Mario Draghy covering in “Next steps on the road to financial stability” about everything under the sun, except for the risk-weights, one feels, no matter how impolite, an urgent need to shout “It’s the risk-weights, stupid!”