Tuesday, October 4, 2011

Milestones in regulatory myopia

In Europe under Basel II banking regulation (the current regime), a bank can hold any amount of the debt of the country it is in, with a risk weighting of zero. In other words, no capital at all is required for a bank to hold gov't bonds of its home country.

This may be the reason that Dexia, the Belgian bank, which recently passed regulatory "stress tests" with flying colors, is now in talks with the Belgium government for another bailout, just three years after their last bailout.

Is this so hard to understand: if you bail out banks that make risky loans, you get more risky loans.


  1. This isn't regulatory myopia. Its part of the design. Heck in the US, the reason we even have national bank charters is because the federal government wanted captive buyers for its debt.

    This is also why countries bail out their banks instead of allowing bank reorganization. They don't want the bank to sell its assets which would raise the interest rate for the government/state.

  2. Nice post. I love finding someone even more cynical than I.