Financial Times article reports on British FSA idea to force banks to hold 6-10% of assets in government bonds. Becasue bank hold today some 5% of assets in government bonds, it would imply a shift of GBP87 to GBP353bn from credit risk assets to government securities. One question and one observation immediately arise:

  • question: what will be the impact of regulatory selling of credit spread assets on already very depressed market?
  • observation: many economists have raised a question about credit standing of governments that adopted huge bailout plans, UK and USA in particular. There was a doubt whether Asian and Gulf investors will continue to fund these huge borrwing needs into 2009 or 2010. Now regulators seem to have found a perpetuum mobile. We inject state owned capital into ailing financial intitutions raised by … selling government bonds to these institutions. I need to do some math to see the net result, but it feels that corporate lending may be squeezed further, a very unwelcome outcome these days. Any thoughts?