The adjustment for risks is based on the "perceived risk" and NOT the real final and total risk.

Sir, Tom Braithwaite in “Warning on bank rules reform” June 22, writes about the Basel III’s “minimum 7 percent ratio for common equity capital for assets, adjusted for risk” To understand the real significance of that ratio we must be much clearer about the fact that “adjusted for risk” means adjusted for the “perceived risk”, and which does not necessarily have anything to do with an adjustment to the real final and total risk.

Ask yourselves: “If I was a responsible bank regulator, what would cause me to lose most sleep at night, the excessive lending by banks to what was perceived as risky or the excessive lending by banks to what was perceived as not-risky but that could in fact be very risky?”

Once you have answered the previous question as it must be answered, and reflect on how the current capital requirements for banks in Basel II are based on treating what is perceived as not-risky as if it really was not-risky, then you will begin to understand the monstrous mistake committed by the bank regulators.