Osborne lectures EU on banks
BBC business editor Robert Peston on the Chancellor's tough line on stress tests
The European emperor had no clothes, is broadly the gist of George Osborne's article in today's FT about the eurozone's financial strains.
What he has to say about the weakness of Europe's banks, and the apparent fatuousness of last year's much heralded "stress tests" to assess the robustness of EU banks, is worth quoting:
"It is revealing that the tests conducted last July identified a capital shortfall of just €3.5bn. Yet less than six months later, Irish banks required 10 times that amount. That is why the UK has already gone further with tougher stress tests that mean our banks are well capitalised."
This does of course raise a question for Mr Osborne and the Financial Services Authority. Readers of this blog will be well aware of the widespread concerns last spring that the stress tests weren't tough enough, that they exaggerated the strength of Europe's banks.
Yet the UK joined in the chorus of European countries claiming that the stress tests proved that the health of European banks was tickety boo - only for it to become conspicuous within weeks that many of them had and have less capital relative to their loans and investments than their US and UK counterparts, that their liquid resources are inadequate and they remain too dependent on unreliable wholesale funding.
Some would say it might have been helpful if Mr Osborne, or the chairman of the FSA or the governor of the Bank of England had raised these concerns a few months ago.
Since Mr Osborne's criticism of the stress testing process is bound to infuriate his fellow European ministers, it might have been better to annoy them early.
Mr Osborne hopes that new stress tests, which European governments have agreed to conduct, will be more credible. And he raises the possibility of semi-nationalisation of some continental banks.
He makes two other striking points. First he sets himself up as roadblock to German hopes of restricting the short-selling of European government bonds, or the selling bonds that the investor does not already own.
Mr Osborne says there is no evidence that short-selling has in itself made it more difficult for European governments to borrow, which is presumably the point that matters.
He argues that current plans to limit such speculation would actually force interest rates higher, which would be the opposite of what EU members would wish to achieve.
Second, he is plainly worried that European governments are trying to water down the new global Basel rules on the amount of capital and liquid resources that banks must hold. This is what he says:
"It is vital that we insist on its implementation in the US and elsewhere, and that we do not weaken the measures as they are translated into European law.
"And we should do the same with the agreed G20 principles on bankers' pay. Any talk of 'European specificities' in Basel III that are not already accounted for, and any delay to the agreed timetable, will simply reaffirm markets' suspicion that we are failing to address the difficult issues."
Why does this matter? Well there are many who believe that the new Basel standards for capital, liquidity and funding maturity don't go nearly far enough to make the banking system less prone to the kind of meltdown we saw in 2008 - and so any dilution of those standards might not be a wholly good or reassuring thing.
You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.