April 02, 2014

A positive carry over financing, on zero bank capital… is that not an infinite return on equity?

Sir, I refer to Christopher Thompson´s and Claire Jones´ “Eurozone banks load up on state debt” April 2.

There we find: “The Basel II rules allow regulators to treat sovereign debt as risk free, meaning banks do not have to hold any capital against it” and “Banks were given a chance to borrow at 1 percent from the ECB, invest in sovereign debt… and earn a positive carry.”

Is this not what I have been screaming my heart out over for more than a decade? Like when in November 2004 you published a letter of mine in which I asked… “What will it take before the Basel Committee starts realizing the damage they are doing by favoring so much bank lending to the public sector? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits”

Sincerely, if you are in the hands of bank regulators, or financial journalists, who do not understand that the risk based capital requirements for banks has to produce different risk-adjusted returns on equity, which utterly distorts the allocation of bank credit to the real economy… I have to feel pity for all of us… of the Western World.