The Shocking Basel II Discrimination
The market, looking at all risk information, which includes that of the credit rating agencies establishes some risk premiums that will make lending to different perceived risks equivalent. But then tha Basel II regulators made the mistake of using the same information provided by the credit rating agencies by mean of the risk-weights they applied and in doing so discriminated excessively in favor of what was officially perceived as having a very low risk of default. the AAAs. The following table illustrates the gigantic magnitude of that regulatory anti-risk-bias for a figurative example of how the market could be viewing a AAA risk versus a Not Rated risk:
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