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Who Is Risk Taking For? Banking in the Shadow of SVB

Silicon Valley Bank failed, in part, because it parked its cash in long-term U.S. government bonds. But why were Treasuries so attractive in the first place? One reason is that regulators assign the lowest possible risk-weight to U.S. government bonds. This favorable weighting does not, however, reflect a neutral assessment of actuarial risk. Rather, it reflects a policy choice to encourage banks to hold government debt. More broadly, risk-weights have long deviated from assessments of actuarial risks to encourage (or discourage) lending to particular sectors.