Banks: Zones of scepticism

This week the eurozone will attempt to find a solution to the deepening banking and fiscal crisis. Many believe that liquidity provision may provide a short-term solution, but the deeper problem of solvency of many governments will remain. There is often a strong overlap between borrowing by governments and lending by banks. This relationship has a long history in India. In the light of the problems of Europe, it is important to look at this intimate connection with fresh scepticism, and worry about distancing bank assets from government bonds. Holding risk-free government bonds, a practice Basel norms encouraged for banks, has, as it has turned out, encouraged governments to borrow imprudently.

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