The logic of assessing capital requirements based on the risk of an institution’s assets is sensible in principle; however, it creates incentives for institutions to structure assets in ways that minimize the use of capital, perhaps resulting in risks that become hidden in opaque or complex structures that are not addressed by specific rules or classifications found in the Basel framework.
Such a cycle of increasing complexity raises both compliance costs and enforcement costs. Thus, I believe, there is merit in developing simpler, more transparent regulatory solutions designed to work reasonably well in a wide range of situations.