Why simplicity in banking is risky business

The temptation to using simple ratios for bank capital requirements may be appealing, but a robust approach to bank solvency should also include risk-weighting of assets.

The current enthusiasm for simpler measures of banks’ capital solvency is understandable but dangerous. Abandoning risk-based measures in their favour could make the financial system less safe while simultaneously impeding the flow of credit to the real economy.


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