jedemdasseine
19th April 2010, 09:54 PM
I have attended several noteworthy economics conferences this past year, and I have had opportunities to submit questions in writing to many prominent economists, many of whom are regularly referenced on this board and within the gold community at large. Gold miners, European central bankers, billionaires, basically the whole gamut of people who at least ought to be "in the know." I've had all my questions answered except one, to which I now present to you all. Most simply ignored this question and moved on to the next. Please help me understand these matters and provide any clarification you can. This is a subject about which I know only a little, but I'm trying to learn more. Thanks
Verbatim:
My next question concerns the transition of European Banks from Basel I to Basel II, and in particular, the consequences of this transition on the US dollar. It is my understanding that pursuant to Basel I, which presently is being phased out, European banks’ leverage may not exceed a 12:1 ratio or 8% capitalization, lest banks carry dangerous levels of “capital adequacy risk” (per SIGTARP) and are thereby deemed too risky to clear transactions under agreement. Predictably, under Basel II, capitalization restrictions and requirements have been eased, whereby a bank may now substitute capital against assets with insurance swaps against those respective assets. The primary issuer of these insurance swaps is AIG. I’m simplifying these matters a great deal, but the thrust of the matter is that European banks are now even more over-leveraged than ever, and if one follows the trail of counterparties, the trail ends at the balance sheet of the US Federal Reserve by way of AIG. If I understand the chain of counterparties correctly, and please correct me if I am wrong, then it appears that the US Federal Reserve is indirectly backstopping or underwriting European banks. Do I understand this situation accurately, and is this but another twist to Triffin’s Paradox?
Verbatim:
My next question concerns the transition of European Banks from Basel I to Basel II, and in particular, the consequences of this transition on the US dollar. It is my understanding that pursuant to Basel I, which presently is being phased out, European banks’ leverage may not exceed a 12:1 ratio or 8% capitalization, lest banks carry dangerous levels of “capital adequacy risk” (per SIGTARP) and are thereby deemed too risky to clear transactions under agreement. Predictably, under Basel II, capitalization restrictions and requirements have been eased, whereby a bank may now substitute capital against assets with insurance swaps against those respective assets. The primary issuer of these insurance swaps is AIG. I’m simplifying these matters a great deal, but the thrust of the matter is that European banks are now even more over-leveraged than ever, and if one follows the trail of counterparties, the trail ends at the balance sheet of the US Federal Reserve by way of AIG. If I understand the chain of counterparties correctly, and please correct me if I am wrong, then it appears that the US Federal Reserve is indirectly backstopping or underwriting European banks. Do I understand this situation accurately, and is this but another twist to Triffin’s Paradox?