In fact, assuming all assets are equally risky could create perverse incentives, says Mayra Rodríguez Valladares, managing principal at MRV Associates, a firm that consults on Basel issues. Freed from risk weights, banks may be more inclined to make certain types of loans that have historically experienced big losses, like home equity mortgages. “Banks might invest more in high-yielding, high-risk assets,” said Ms. Rodríguez Valladares. “It’s totally inaccurate to lump everything into one category.”
Also, Basel III may end up being significantly stronger than its critics say. For instance, the world’s largest banks will be subject to a special surcharge. Ms. Rodríguez Valladares says there are discussions about whether to calculate this extra capital on total assets, not risk-weighted assets. Go back to TBTF Finance with its $28.5 billion of capital. Adding 2 percent of its total assets, or $12 billion, would take capital up to $40.5 billion.