Turning the bank capital thumbscrews in Europe!

According to Basel II, until January 13, 2012 European banks could hold sovereign debt of Spain against zero capital and then, until May 13, they were required to hold a modest 1.6 percent in capital; currently, with Spain rated BBB+, they need to hold 4 percent, and, if Spain would be downgraded 3 notches more, to BB+, then they would be required to have 8 percent of capital. 

Of course, the more capital you must hold against any asset, the higher must the interest rate be in order to produce the same return on bank equity… which is one of the torture instruments of that so cruel economic torture chamber the Basel Committee bank regulators unwittingly designed. 

Of course, if and when banks are required to hold 8 percent in capital when lending to Spain, the same capital they are required to hold when lending to ordinary small businesses or entrepreneurs, then that would be a more real market rate… since all those lower earlier rates where in fact regulatory subsidized rates. 

And Europe still has the same set of regulators using the same paradigm writing up Basel III! Go figure that out.