Greece, Europe, to keep your banking sector afloat, and in good spirits, look to Chile.

Sir, Wolfgang Münchau writes: “So to default “inside the eurozone” one only needs to devise another way to keep the [Greek] banking system afloat. If someone could concoct a brilliant answer, there would be no need for Grexit.” “A Greek default is necessary but Grexit is not” April 20.

I am sorry. I do not think the problem of banks is limited to the Greek ones. All European banks must surely have problems with excessive long-term exposures at low rates to what is perceived as “safe”, and to which they are seriously undercapitalized because of the risk-weighting… and any little tick up in interest rates could wipe out all their equity.

In my mind what Greece (and the rest of Europe) most need now is an ambitious recapitalization of banks plan that brings their equity up to around 8 percent for all assets… inclusively against sovereign debt. None of that risk-weighted assets nonsense that only confuses.

Chile might be the role model for how to proceed. Banks there were recapitalized by the Central Bank issuing local credit, in order to buy all the nonperforming loans of the banks. And the banks in their turn agreed to repurchase all non-performing loans, plus to pay some interests, out of retained profits... before resuming any dividend payments.

In fact that is what ECB should be doing with its QEs. To have ECB competing with pension funds and widows and orphans for whatever little “safe” assets there are left does not make much sense.

@PerKurowski

What UK (and Europe) needs, is a massive capital injection into the banking system

This is in reference to “Osborne is too complacent about Britain’s economy” Martin Wolf, May 24.

Sir, first, in the UK, if a bank would give a loan to a Solyndra, the solar power company that recently went bankrupt in the US, it would need to hold, according to Basel II, 8 percent in capital. But, if the bank instead lent that money to the UK government, and so that a UK government bureaucrat could relend it to a Solyndra then, according to Basel II, the bank needs to hold no capital at all against that. That is a huge distortion that needs to be eliminated, and to be replaced by a general capital requirements against any asset, 8 to 10 percent.

Second, because of such regulatory distortions UK banks (as all European banks) have ended up with a dramatic gross, not risk-weighted, shortfall of capital, and which now not only stops them from being able to lend but even forces them to contract. And so, when Martin Wolf writes about “the private sector has a huge structural excess of income over spending” my recommendation, instead of those huge government investment programs Wolf suggests, would be to launch a massive bank capitalization program, offering special tax incentives for all “private excesses” which are converted into bank equity.

How much capital? Whatever is needed for the banks to hold 8 to 10 percent of it, against all assets, including government debt. At that moment the general risk-profile of banks would also change dramatically. At that moment banks can start to contribute to help the real economy to grow.

Why is it that some insist that all rescue actions is to be carried out by governments? Could it be that this crisis is being exploited to advance some political agenda through the backdoor?

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… at least so he thinks.