An AAA rating signifies a “prime” asset and assets rated below BB- signify, at their best as “highly speculative”
So here is the question:
What might be more dangerous to the banking system, too much exposure to AAA rated assets, or too much exposure to below BB- rated assets?
If you reply as I do, that of course banks would never-ever build up excessive and dangerous to something rated below BB-, and that this is much more likely to happen with AAA rated assets, then I dare you to reflect on the following:
PS. What legal consequences should a bank regulator face if, informed of a serious mistake, he does nothing to correct it?
Your regulators, for the purpose of deciding the capital requirements for banks, assigned a risk-weight of 150% for assets rated below BB-, and a risk-weight of only 20% to AAA rated assets.
Does that sound like the regulators know what they are doing?
If you answer “Yes!” go back to sleep, but if by any chance you answer “No!, then you must know you have a very important assignment in front of you, that is, if you care about the future economic perspectives of your children and grandchildren.
And this is just an appetizer on all the Basel Committee for Banking Supervision’s idiotic mistakes.
PS. What legal consequences should a bank regulator face if, informed of a serious mistake, he does nothing to correct it?