"There is really just one glaring problem with government regulation of banks – it’s too nice to the government. The US government decreed that US treasuries ha

"There is really just one glaring problem with government regulation of banks – it’s too nice to the government. The US government decreed that US treasuries have a risk-weight of 0%, that they’re considered a highly liquid asset on par with cash, that the government is exempt from single-counterparty limits, and so on and so forth." This gets to the heart of the network effects of the 2008 housing price crash. People were modeling mortgage risk as lower because of the implicit guarantee of the government sponsored enterprises which went into conservatorship. If we think about financial institutions trying to hold this kind of debt to meet their risk ratios, there is a lot of incentive to create and hold more of this "low risk" money. This ends up creating counterparty risk, when a sizable chunk of everyone's "low risk" assets drop in market value. It seems like there would be benefit in running the models with a number other than 0 in there for US Treasury risk.