Europe, don’t you wish your banks had been shadow banks, or at least were shadow banks now?

Sir, I refer to Patrick Jenkins’ and Sam Fleming’s analysis of shadow banks in Europe “Into the shadows – Taking another path” June 17. What a strange history telling!

First they quote Jean-Pierre Mustier, the former investment banking boss at France’s Societé Générale remembering “the dark days before the 2008 financial crisis” saying: “Before the crisis, there was a lot of ‘dark’ shadow banking… pushing chunks of loans… designed to dodge rules on excessive risk taking”, and write that “About $400bn worth of subprime loans and other assets… that had been coursing through the shadow banking”.

What? After Basel II was approved in June 2004, banks in Europe were allowed to hold AAA rated securities backed by subprime mortgages against only 1.6% in capital, signifying an authorized leverage of 62.5 to 1. The truth is that no shadow bank, no matter how defined, could never ever aspire to achieve such a leverage, unless in a fraudulent way.

Of course, a bank with a low risk portfolio could be allowed to hold less capital than a bank with a higher risk profile, but that would be one single capital requirement against its whole portfolio; and not as now, different capital requirements against different parts of the portfolio. Had it been like that the European banks would never had had the incentives to build up such huge exposures to the infallible sovereigns, the AAAristocracy or the housing sector, nor to abandon the “risky” small businesses the entrepreneurs and the start-ups.

Frankly, as is, the best chance that unemployed European youth has of not becoming a lost generation would seem to be for all European banks to run into the shadows.

Then the authors write that part of “the raison d’être of the shadow banks is arbitraging the regulated banking system”. Indeed but they should ask themselves first about who is serving up such incredible generous menu of arbitrage possibilities?

And we also read that “policy makers such as Mark Carney, governor of the Bank of England and head of the FSB, argue that some shadow banks will have to be supervised more like banks”. Europe, pray your shadow banks fast run deeper into the woods, way out of reach of these regulators who, with so much hubris, believe they should be the self appointed risk-managers of Europe.