Wednesday, May 9, 2012

Europe…what if?

What if European bank regulators had imposed their 8 percent capital requirement for banks on all their assets (12.5 to 1 leverage) like they did for instance on loans to small businesses and entrepreneurs, instead of allowing the banks to hold some ex ante perceived as no risk assets against a meager 1.6 percent or less (62.5 to 1 leverage)?

Just for starters, European banks would not have invested in triple-A rated securities backed by lousily awarded mortgages to the subprime sector in the USA; would not have lent the outrageous amounts they did to Icelandic banks or Greece; and Spanish banks would not have overexposed themselves to the real-estate sector. Do you want me to continue?