Banking and its effects on the money supply and asset bubbles: Part 5
Risk-weighting assets and the reflexive recency bias.
Dear Reader,
In Part 1 of this series we dissected what a bank does at its core.
In Part 2 we looked at how a fractional reserve banking system works.
In Part 3 we showed how this banking system increases the money supply.
In Part 4 an unbounded money supply was shown to reflexively drive asset bubbles.
Today, in the final part of this series, we will discuss the regulatory measures that authorities have implemented to try and reduce the riskiness inherent within a fractional reserve banking system.
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Credit-risk and the risk weighting of assets
The framework with which banks determine how much capital they need to allocate and hold against their credit exposure is called risk-weighting. This reflects the…