Unlocking nonbank markets As the crisis unfolded, it became clear that the normal tools of the Federal Reserve – lower interest rates and loans to banks – were not going to be enough to maintain the flow of credit to consumers and businesses.
And he adds that “banks use the risk weighting to expand their business to, in some cases, one hundred times their capital.” And yet the fundamental theory behind risk weighting is quite plausible: if the same percentage of capital is to be held for all assets across the board, this gives banks an incentive to invest particularly in riskier assets in order to increase their return on equity.