BBC News
October 19, 2011
So where are we on this bloomin' deal to save the eurozone and, in theory, the world?
Well, the German government has been busy hosing down expectations that this weekend's eurozone summit will deliver anything more than progress, presumably so that investors don't defenestrate themselves on Monday morning at the blinding realisation that many of the currency union's structural flaws are not amenable to overnight remedies.
It would however be extraordinary, and fairly terrifying, if a deal isn't announced to recapitalise the banks, along the lines I outlined last Thursday.
As I mentioned, the European Banking Authority has recommended that banks should be forced to increase their reserves against losses, so that they would have core tier 1 capital equal to at least 9% of their risk-weighted assets, on a Basel 2.5 measurement, after marking down to the market price the loans they've made to the Greek, Italian, Spanish, Portuguese and Irish governments.
The EBA, the senior banking regulatory body for the EU, says this devaluation of sovereign debt should apply to loans held in the banks' trading books and in their banking books. That may sound hideously technical, but it simply means that banks can't ignore the losses on loans to Greece, for example, simply by parking the loans in the part of the bank where market prices aren't typically used for valuations.
Of course, a consistent policy of pricing to market, irrespective of where the sovereign debt is held, would force banks to raise significantly more capital as protection against potential losses than the previous approach of ignoring the banking-book holdings.
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