As some readers know, I have a special place in my stony neoliberal heart for Techie Chan, the Greek Left’s resident statpornographer.
He doesn’t blog in English (by choice probably) but the very few Greek tweeps who don’t know him had better check him out. He’s even kind enough to humour my tweeps and me when we joke that Techie and I are actually the same person arguing both sides of the debate for kicks.
In his post on this subject, Techie cites Greek banks’ loan to deposit ratios of 100%-120% (actually an average of 101%) as proof that they got themselves into the mess they’re in, claiming that 80% is the benchmark for sustainable leverage. Actually, as the following graph (originally from Zerohedge here) demonstrates, Greek banks were not particularly trigger happy by global standards. They were about average, and Techie's 80% benchmark is about two-thirds of the way down the distribution.
And mind you this is after a wee bit of deposits flight too.
Now, I will happily grant Techie that banks the world over are over-leveraged (read on as to why, though!) but it is a big of a stretch to claim that Greek banks deserved to go under on this basis when not so many of the rest of the world’s banks have. This first part of my argument is actually quite simple. With lenient markets, such as we had up to 2007, the optimal level of bank leverage is determined by earnings growth, and that was not half bad for Greek banks. With tight-ass markets, the kind we actually have now, the real issue is the degree of reliance on short-term wholesale funding. So did Greek banks rely disproportionately on short-term wholesale funding? Well not until they got into trouble, with exceptions of course.
The second part to my argument is slightly more technical but much juicier. You see, what Techie forgets (and most people completely ignore) is that leverage is not fungible. It’s more like Popeye’s spinach – Popeye eats it and it all ends up in his freaky-looking arms instead of making him all-round super-buff. Similarly, a bank’s 20x leverage does not finance all of its assets equally; rather, capital requirements courtesy of Basel implicitly assign a maximum leverage ratio to each assets class through risk weighting, and therefore decide where the leverage goes. I know the banks don’t think this way when they borrow to cover financing needs, but that’s how their incentives are aligned; they can’t help it. Former World Bank Director Per Kurowski illustrates this very well in his most recent paper on how Basel has turned banks into weapons of mass destruction.
You see, all the way to early 2009, Greece’s credit rating – an incredible, and, as it turned out, unrealistic, AAA to AAA negative for all agencies, meant positions on Greek bonds could be financed through UNLIMITED leverage according to Basel II regulations. Treatment under Basel I, the previous regime, was similarly lax. So really, it was no surprise that they tanked as soon as the finances of the Greek state came into question.
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