On June 26, 2004 our banks in Europe and America got castrated, and our real economies became doomed... to stall and fall

On the 26th of June 2004 the G10 approved Basel II. With that they declared as a regulatory principle that if banks lent to a corporation rated AAA to AA- “The Infallible”, it needed to hold only 1.6 percent in capital, signifying an authorized leverage of bank equity of 62.5 to 1, but, if it lent to someone rated BBB+ to BB-, or without a rating, “The Risky” then it had to hold 8 percent in capital, and thereby being authorized to only leverage 12.5 times to 1. 

That meant of course that from that day on banks would earn much higher risk-adjusted returns on their equity when lending to “The Infallible” than when lending to “The Risky” and that meant, of course, that from that day on banks would only lend to “The Infallible”, that is unless “The Risky” were willing to pay the banks much higher interest rates than those higher interest rates they were already paying to the banks, because they were perceived as more risky. 

And that meant that the risk-taking that had helped Europe and America become what they were was halted in its track… and no longer did it help that in church hymns praying “God make us daring” were sung, from that day on Europe, and America, or at least their banks, had been castrated and sang in falsetto. 

And it only took some few years for Europe and America to start stalling and falling, with their banks drowning in excessive exposures to “The Infallible”, such as triple-A rated securities backed with lousily awarded mortgages to the subprime sector in the US, or loans to sovereigns like Greece. 

And from that day, day by day, less bank financing was awarded, on reasonable terms, to “The Risky”, those small and medium companies, and entrepreneurs, best in position to deliver to our youth the next generation of jobs.

Damn Basel II and all those responsible for it, and damn all those helping to silence what the regulators did, on their own, with absolutely no authorization.