But the grouping of individual loans and securities into necessarily broad categories of risk weights (e.g., residential mortgages) can be arbitraged. And a firm holding lots of assets that look very low-risk in normal times can be vulnerable if its total leverage is high during stress periods.
Models-based capital requirements can better distinguish among risks to some degree, and they can be made more forward-looking than static leverage or risk-based ratios. But, to the extent that banks’ internal models are used, it  8  is difficult to monitor whether banks are intentionally or unintentionally running models that understate their risks.