The risk weights on housing loans extended by banks to individuals, were increased from 50 to 75 per cent in December 2004. Subsequently, while the risk weights on smaller size housing loans (priority sector) were reduced from 75 to 50 per cent, the risk weights on larger loans and those with LTV ratio exceeding 75 per cent were increased to 100 per cent.
Second, bank owners can earn a greater return on their investment by using less of their own money and borrowing more - leverage. And, the most a bank owner can lose is their capital. The wider public loses a lot more (see Figure 2). Hence, we need to impose capital standards on banks that matches the public’s risk tolerance.