Here an explanation of Basel’s risk weighted bank capital requirements, for dummies and for economists (including Nobel Prize winners).
1988 Basel I (30 pages), the Basel Committee decreed lower bank capital (meaning equity) requirements for banks against assets perceived (or decreed) as safe, than against assets perceived risky.
2004 Basel II (347 pages), assigned some few (human fallible) credit rating agencies, a decisive role in deciding what’s safe and what’s risky.
And that means:
Banks can leverage more their equity holding safe assets than when holding risky assets.
It is easier for banks to obtain a higher return on equity with safe assets than with risky assets.
That what’s perceived as safe, who already has easier and cheaper access to bank credit, are additionally rewarded.
That what’s perceived as risky, who already has harder and costlier access to bank credit, are additionally punished.
Banks exposures to “safe” assets, e.g., government debt and residential mortgages will be larger.
Banks exposures to risky assets, e.g., loans to farmers, small businesses and entrepreneurs, will become smaller.
Banks will refinance more the safer present than finance the riskier future.
If you are an economist, you should be expected to have known this how this would endanger bank systems and weaken the economies. Sadly it seems they didn't and still don't… that is of course unless their silence is based on that they like or benefit from the distortions in the allocation of bank credit that are produced.
2017 - 202? Basel III Many thousand of pages.
Note: As a much ignored economist I have, since 1997, strongly objected the Basel Committee's concoctions.
You can find much more of this in:
https://subprimeregulations.blogspot.com/
https://teawithft.blogspot.com/
Since April 2023, I have been much assisted in this by AI: ChatGPT and Grok
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