European Banking Crises Appears to be a Self Inflicted Wound

The Telegraph reports that "European Banks are Staring Into the Abyss." The problem is that the banks are overexposed in their holdings of government bonds from the various EU governments. 

How come European banks have got so much of the stuff? Well ironically, this is one lending decision gone wrong that the banks cannot be blamed for. In response to the original banking crisis, regulators ordered banks substantially to increase their liquidity buffers. Government bonds are generally viewed as the most liquid and least risky assets to hold, so that's where the money went.

That these regulatory obligations also helped governments fund their ever growing deficits is by the by. In any case, nowhere is the law of unintended consequences more in evidence than in financial regulation. By seeking to address the last crisis with greater liquidity buffers, regulators succeeded only in sowing the seeds for the next one. A banking crisis that transmogrified into a sovereign debt crisis now shows every sign of transmogrifying back into another banking crisis.