Notes From Underground: The Brothers GRIMM and other fairy tales

We have word from Europe that the stress tests done on their regional banks will be fair and transparent. Do we believe that to be possible? No way, no how. The stress tests will be dependent on the questions asked and if the DESIRED OUTCOME is already known, then the questions are, of course, self-fulfilling. Right or wrong, the elites of Europe are too vested in the EU project to let any genuine tests bring this “edifice” tumbling down. Helmut Kohl often opined that the major purpose of the EU was to secure the blessings of peace for its children and grandchildren. This dream will not die easily–noble ideas seldom do.

European officials have pledged “maximum transparency” but there is a great deal of latitude in that phrase. So as we are assured of the outcome, the most important test will be whether or not the market gives the stress tests results the same credibility that was afforded the similar tests in the U.S. After all, the only thing that matters is the market’s pricing of the results.

More important to us at NOTES was the news out of BASEL yesterday that the immediate stringency of BASEL III was watered down at the behest of European banks. The lobbying effort was led by German and French banks that were very worried about the impact of tougher and tighter capital requirements on profits. The transition period was extended for up to 10 years and some analysts suggested that the new capital requirements may have required a capital raise of more than $300 billion. The major changes in BASEL III would be on risk taking and how much capital would be needed, thus resulting in a contraction of bank lending.

The large global banks are demanding a phase in period to limit its impact while the global economy is so fragile. The bottom line for BASEL III is that it has been as lobbied and polluted as the U.S.’s FINREG, resulting in a rather meaningless regulatory guideline. The purpose of the regulatory change was to make the global behemoths more stable and change the business models. As Nout Wellink, Basel committtee chairman and the president of the Dutch central bank, succintly said:

“More stable, less leveraged banks would raise average ratings, improve the terms on which banks could raise f unds and lower the required return on equity … that high shareholder returns were unsustainable for they were generated by high leverage and risk taking….”

Again, we have a situation in which the macro-prudential regulator advises and those who are remuneratively effected obfuscate. This is the model that the global financial world rests on. It is no wonder that the emerging nations are turning a deaf ear to the developed nations. What one hand pretends to give, the other hand takes. Please read our hero’s other work in the Brothers Karamazov, the chapter entitled the “GRAND INQUSITOR” for greater understanding.

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