So we\’re screwed then are we Professor Congdon?

Tim Congdon\’s got a nice piece about the eurozone breakup here. Essentially, the risk to the UK is bank capital and that risk depends upon:

As always in these exercises, much is guesswork. Eurozone break-up might wipe out 2pc of UK banks\’ assets. That may not sound like much, but let us assume – realistically – that UK banks\’ capital is 6pc of assets. So the eurozone-related loss is a third of capital. How should UK officialdom react to this sudden destruction of capital?

It is vital it does not demand that banks quickly restore the original 6pc ratio. As the events of late 2008 and early 2009 showed, hurried recapitalisation causes banks to shrink their risk assets, reduces the quantity of money and leads to economic downturn. If the break-up of the eurozone does result in significant losses for our banks, they must be given time to rebuild their capital and assets.

Britain can cope with the break-up of the eurozone, but our banks – and hence our economy – will suffer if officialdom reacts by again foolishly ordering banks to raise immense amounts of new capital in just a few weeks.

So we depend upon wise politicians and bureaucrats.

We\’re screwed, aren\’t we?


1 thought on “So we\’re screwed then are we Professor Congdon?”

  1. Surreptitious Evil

    It’s not capital – it is “Tier One capital” that is vital in the regulated arena. Surely PIIGS bonds are no longer regarded as Tier One anyway, therefore a fall in their value wouldn’t matter as much?

    And this might just strengthen the values of German and French bonds, which are still Tier One?

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