The Basel Committee on Banking Supervision’s attempts at making the regulatory capital rules more credit risk sensitive have been widely supported. Much of that support stems from the fact that the current rules fall woefully short in this regard. They were imposed in the late 1980s, primarily to reverse the steady erosion of bank capital ratios. On that basis, the initiative has been successful. But, as always, there have been unintended consequences.
The crude classification of obligors in
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