Excellent Explanation of Why Euro Crisis is so Scary
From the worldwide bloggelspweb:
"A primary fallacy of the Basel Accord is that OECD government debt is risk free and requires no bank reserves. Better yet, the banks can count the government debt they hold as Tier 1 capital, reserving against other debt assets. The Basel Accords assume all OECD government debt is a cash proxy, being liquid in all market conditions…
Roughly, the risk weights of the main asset classes under Basel I were:
– zero for Zone A (EEA and 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…
With Basel II they could reduce capital even further by writing each other a daisy chain of credit default swaps for all categories of exposure…
OECD government debt is zero risk weighted and accounts for a disproportionate bulk of Tier 1 capital of major banks."
For more see here. (Global Macro Monitor) Itself linking to this original post. (London Banker).
That about sums it up, folks.