Insight is hard, and worse, it tires, and dangerously, we’re not always willing to pile bad news atop bad news. It’s best if we know a crisis ends, but sometimes we must endure.
We truly need to know. History is turning now.
Let’s begin our journey by pointing out a regulatory ‘anomaly’ which has allowed European banks to take on much more leverage than their American colleagues and which now makes them far more vulnerable.
In Europe, unlike in the US, it is only risk-weighted assets which matter to the regulators, not the total leverage ratio. European banks can therefore apply a lot more leverage than their US counterparties, provided they load their balance sheets with higher rated assets, and that is precisely what they have been doing.
That is fine as long as you buy what it says on the tin.
But AAA is not always AAA as we have learned over the past 18 months.