This is fascinating (for a certain level of fascination).
You know those constant cries about how we\’ve got to have international regulation of the banks to put them back in their boxes?
Walter Wriston\’s 1970s dictum that \”sovereigns can\’t default\” was disproved in the Third World Debt Crisis of the 1980s, but somehow the BIS Committee on Bank Supervision still embraced it when applied to OECD state debts.
Roughly, the risk weights of the main asset classes under Basle I were:
– zero for Zone A (OECD) government debt of all maturities and Zone B (non-OECD) government debt of less than one year;
– 20 percent for Zone A inter-bank obligations and public sector entity debt (e.g. Fannie Mae, Freddie Mac, et al.);
– 50 percent for fully secured mortgage debt;
– 100 percent for all corporate debt.
\”Risk weights\” are how much capital did a bank have to put against a loan? (The purchase of a bond is a loan in this sense). 100% would mean 8% had to be set aside. Just the same as our old friend the reserve ratio in fractional reserve banking.
0% of course means that no capital had to be put aside. Even worse, holdings of those OECD Zone A (and B of short maturity) bonds which, remember are loans (like, to Ireland!) not only needed no capital reserved against them, they themselves counted as capital against further loans of any type!
So the first lesson is that the issue is not how much regulation we have of the banks, nor even whether it is international or not. It is *what* regulation we have of the banks.
The second is we have an answer for Willy Hutton. You know his perpetual complaint that the banks won\’t lend to companies? Well, this is part of the reason why. They can gorge themselves on as much government debt as they like and they\’ve not got to put a single penny of capital towards it. So Geo. Osborne can borrow as much as he wants and poor old BP cannot (well, OK, this would be true if capital reserves were the only influence on such decisions, which they clearly aren\’t, but they do have an influence. These reserve ratios do make it cheaper for governments to borrow and more expensive for companies.)