It is low capital requirements that generate the type of yield of which great bonuses are made of

Sir Tony Jackson writes that the reason why “banks are up to their eyebrows in dodgy sovereign debt” is they have “fasten to instruments with investment-grade rating and junk-grade yields”, “Politics remains the biggest barrier to bank regulations” May 17. At this point of the crisis it is astonishing how wrong Jackson can be. Where has he been?

These sovereign debts did not pay junk-grade yields they paid relative low rates but these rates were made especially attractive for the banks because these were required to hold very low capital requirements against them.

For example a bank holding debt of Greece, between mid 2000 and December 2009, needed only to have 1.6 percent in capital… which allowed it a 62.5 to one leverage. Take any small margin and multiply it 62.5 times and you will get the type of yields of which great bonuses are made of.

It is not politics but the Basel Committee, who remains the biggest barrier to rational bank regulation.