A new working paper published by the International Monetary Fund argues that there remains a divergence between market assessments of risk and regulatory assessments of risk. The paper finds that in jurisdictions where banks have more discretion over the calculation of risk-weighted assets (“RWA”), such as in Europe under Basel II, investors tend to focus on measures of risk other than RWA, possibly due to the fact that banks can optimize their regulatory capital requirements by adjusting RWA without improving the quality of their capital or loan portfolios. The paper also suggests that banks have not adjusted their RWA assets since the financial crisis to reflect increased market perceptions of risk, and that continued uncertainty about the reliability of existing measurements of bank capital can be damaging for financial stability.