From Grant Williams latest TTMYGH: "Basel III attempts to force encourage banks to hold larger percentages of government bonds on their balance sheets in order to shore up their capital bases and to provide a riskless safety net should they run into liquidity problems. Thus far, holdings of Italian debt - with its 20% risk-weighting - have bankrupted MF Global in the space of a week (no 30-day cushion there, then) while the ECB SMP program has spent billions of euros accumulating 20% risk-weighted assets rapidly-declining assets that everybody else wants to sell high-grade Italian (and, latterly, Spanish) government bonds in a desper- ate attempt to stop the very assets that banks have been pushed into holding from bringing down the whole edifice. The absurdity of the situation is striking. After 2008, the world’s major governments (in their infinite collective wisdom) transferred the most toxic assets, that threatened to bring down their countries’ banking systems to their own balance sheets rather than suffer the sharp pain of bankruptcies throughout the global financial sector and the inevitable pain that would follow. Now, barely three short years after Lehman Brothers’ demise, central banks - their balance sheets hor- ribly disfigured by the fiendish experiments they have been conducting on monetary policy (charts, below) - have themselves become monstrous figures; distorted and twisted into barely-recognisable approximations of the institutions we have come to recognise over the decades as the guardians of monetary propriety. Bankenstein’s Monsters... And so we go back to Basel III."
Full report (pdf):