July 02, 2010

And, what comes after in risk-weight targets?

Sir in reference to Samuel Brittan´s “What comes after inflation targets” July 2 I just wish to remember that we also need to remember to change bank regulations targets.

According to an explanatory note issued by the Basel Committee on how the current risk-weights used to calculated the capital bank requirements were set, these were based on a “confidence level of at 99.9%, meaning that an institution was expected to suffer losses that exceed its level of tier 1 and tier 2 capital on average once in a thousand years.

Not that we should increase that confidence level, since what it did was only to drive the banks into an excessive and very dangerous over-exposure to what was perceived as having low-default-risks… precisely that stuff that bank crisis are built from.