Thursday, July 9, 2015
Between June 2004 and November 2009 thanks to Basel II, banks were allowed to lend to the Government of Greece against only 1.6 percent in capital while requiring banks to hold 8 percent in capital when lending to the private sector.
That meant that banks could leverage their equity 62.5 times lending to the Government but only 12.5 times when lending to the private sector.
That meant, of course, that banks ended up lending much too much to the government and much too little to the private sector, like to Greek SMEs and entrepreneurs.
And here we are with Greece stuck in the doldrums and not finding its way out.
If I were its doctor, I would immediately recommend that banks should be allowed to hold less capital when lending to the private sector than when lending to the government. Since the private sector is the heart of the economy it is very urgent it gets out of it flat-line, by banks pumping the oxygen it needs.