Monday, 26 September 2011
A few months ago European bank regulators, not necessarily the finest specimens of humanity in public service, ran stress tests on all the major banks in the EU and concluded that most of those banks were basically sound and had adequate capital.
This was notwithstanding the fact that many of those banks held substantial amounts of government debt.
Now those same governments have started to firm up on how the euro might be rescued. This involves the banks taking a 50% haircut on all the Greek debt that they hold. Now, hang on. Where was this 50% haircut when the stress tests were run?
So do the banks have enough capital?
Well, if they don't, they will have to raise some in the markets.
But what if the markets won't put up more equity because of the way European governments threaten to default unless the banks take a 50% haircut?
Then the banks will have to be supported by their own governments.
How does that work?
The governments buy new equity for cash.
Where do they get that cash?
They borrow it from the banks because it is 0% risk weighted paper and thus does not add to their capital requirements, even though the banks will have just taken a 50% write-off on government debt.
Hang on. I think we have a problem of Enron-esque (Enronic, Enronian?) proportions.