Among the numerous obstacles still hidden in the crisis, there lies one of tremendous amplitude, still carefully concealed despite its imminence: in a few weeks, the banks will announce their results for 2008; they will then have to recognize that their capital stocks (that is to say money or businesses of which they own at least 20% of the capital, in technical terms the “tier one”) have gone down, due to the decrease in value of these assets and the toxic nature of many of them.
According to some estimates, these capital stocks, valued in the most generous terms possible, have in fact dissolved at least hundreds of billion of dollars. Yet, according to regulations imposed by the agreement between central banks, called “Basel II,” this tier must be represented by at least 7% of the amount of bank credit; that is to say that these banks must lend less than 15 times what they have stored away. If this ratio is exceeded, banks will have to obtain new capital stock or reduce their loans, which will deepen their recession.
Furthermore, central banks, wishing not to be accused of having been too lax, will undoubtedly want, in the coming weeks, to increase this ratio from 7% to 9%, in other words, the banks will not be able to lend more than 12 times their resources. Yet, according to some estimates, the world total of bank loans ($85 trillion) is 18 times the total of capital stocks of financial institutions; and even, for certain among them, among the most respected, this ratio is more like 50 rather than 15 allowable! To satisfy the demands of regulators, it will be necessary to increase capital stocks of French banks to at least 100 billion euros, and the capital stocks of world banks to 3000 billion.
Only governments would be crazy enough to invest in banks today. They will therefore have the choice between nationalization, at least in part, or the massive reduction of credit. Nationalization or depression, such is the choice. It has already been made, for every government, left and right alike. And these nationalizations have already starting in Great Britain and Ireland.
To keep them from tearing down the process of European construction, by placing financial institutions in the service of the national interests of their public shareholders, the European Commission must have the tool of nationalization at its disposal, which we could call the tool of “Unionization.” And so that it can also isolate toxic assets, which are reducing the value of assets generally, in an ad-hoc structure, as was done with great success in Sweden in 1992.
Today, nothing is allowing the Commission legally to become a business shareholder or to oppose the changes in norms of the Tier One by central banks. Nothing is allowing it to finance such an expense either, with its pallid budget, limited to 1.28% of the European GDP.
If we do not want the concern for the solidity of the European banking system to be added to the concerns brewing for the solvency of certain governments, without a doubt it will have to come to that. And no one is properly prepared.