[...] each type of asset is given a risk weight, agreed by international regulators, and this is used to calculate the overall amount of equity a bank must issue. Mortgage lending, for example, was thought on the basis of past experience to be relatively safe, and was given a low risk weight. Sovereign debt was believed to be so safe that it was given a zero risk weight, meaning that banks did not have to raise any equity finance in respect of such investments and so had no additional capacity to absorb losses on them. [...]
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