Frank Mayer -- a partner in the Financial Services Practice Group of Pepper Hamilton LLP -- said that "the regulation of any asset as risk-free often distorts bank behavior to create systemic risk," pointing out that before the credit crisis, "there was similar treatment [with zero percent risk-weighting] for AAA-rated mortgage backed securities."
Mayer added that another interesting point that will be discussed at length during the regulatory comment period is the definition of "sovereign debt," since euro zone members "are not necessarily in full control of their own monetary and fiscal policy."
The term "default" will also need to be more clearly defined, according to Mayer, since a country can have an "outright default," where they fail to pay interest on debt, or the country could simply start printing money, "which can be construed a type of default. "
Mayer said that the U.S. regulators' "CRC reliance is a starting point, since it is considered less subject to conflicts of interest," but that "under Dodd Frank, that the you have to monitor your own portfolio to do your own analysis. You are responsible for your balance sheet."
Fitch Ratings on Thursday cut its ratings on eight "Global Trading and Universal Banks," including U.S. giants
Bank of America
(BAC - Get Report)
(GS - Get Report)
(MS - Get Report)
, as well as
(DB - Get Report)
(CS - Get Report)
, saying that the group's "business models are particularly sensitive to the increased challenges the financial markets face," including "economic developments as well as a myriad of regulatory changes."
Written by Philip van Doorn in Jupiter, Fla.
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Philip van Doorn
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