European Banks

I would be interested in seeing Arnold address the idea that if an industry is critical enough to require a bailout from the public treasury, then it should not be a private industry at all (i.e., socializing losses, privatizing profit). Even the Left opposes outright nationalization now but the logic of it is difficult to refute.

The best counterargument I can would involve the idea that regulation could mitigate some of the bad effects while still preserving the positive aspects of private ownership but there seems to be little evidence that regulation works or will work in financial services.

Is the paper trying to say Basel II was the problem, or circumventing regulation was the problem?

If Basel II is the problem, why didn't Canada blow up like other Basel II signatories?

Jeffrey Friedman's book Engineering the Financial Crisis, which you've praised, has a slightly different take, as I think you know. That bank capital regulation, beginning with Basel I and reinforced, not corrected, by Basel II, steered large money center banks into certain kinds of debt - mortgages, sovereign and rated securitizations - by assigning lower risk weights to those classes (as classes, regardless of the individual credit worthiness of individual issues in a class) and thereby requiring less capital to be allocated to them, meaning greater lending volume in those classes, and so a feedback loop was created, in which the demand for those classes kept ratcheting upward, leading to CDOs of CDOs etc. I would be interested to see his take on this paper.

I think it is a good idea for people to focus on European banks rather than US banks as it will dispel many populist myths about US banks' purported mismanagement / culpability in relation to those asset classes. But this paper seems to say US bank regulators did a good job in reining in US banks' risk and balance sheet expansion. That doesn't seem accurate. I think Friedman is closer to the mark.