European deal risks on many unclear details

Whoever analyses the outcome the European summit, that terminated at 4:30 this night, struggles with a clear valuation.
Sure, all three chapters that had to be adressed, were adressed: orderly default of Greece, fresh capital for banks and the strengthening of the firepower of the EFRS. The problem is not even, that the expectations on the single dossiers were disappointed, no that's not the point, because a 50% headcut on Greece's debt, 108 Bill. of cap hike for the leading 70 European banks and the strengthening of the EFSF to 1 Trillion Euro are impressive figures. I hadn't anymore expected that, overall from the German side.
The issue is about lack of details and the unclear implementation. In management terms you call that execution risks.
While Greece is the most concrete dossier with remaining uncertainties about the concrete adherence of the bank, the capital strengthening plan seems more nebulous. While the target sum of 9% "highest quality capital" is clear, it remains open, which assets banks can count as capital in that definition. This question had to be answered upfront, in my view.
The most fuzzy thing is however the quadrupling of the EFSF. European leaders didn't even name the final sum because of the many uncertainties. Pundits calculate, that it should be roundabout 1 Trillion Euro, but nobody said that officially. And the mechanisms are vague (insurance solution with the participation of private investor, but how, who, what conditions?)
The impression remains, that the leaders had committed themselves in a political move to the bottomline. How this bottomline will work, has to defined later. This process is very top-down and it is well known, how many risks such a design runs.

Let's talk seriously about bank capital

Making banks more stable and resilient is one of the key questions in the current European crises. It seems, that regulators and policy makers have reached a consensus, that banks generally should prop up their capital base to have bigger buffers against losses at their disposal. While this is generally a comprehensive objective, I do not aggree, that it is one of the most pressing problems in this phase. So I would like to pose two more or less provocative questions:
1. Is the capital base of European banks really too low?
Just remember: before the crises the minimum regulatory capital stood at 4% Core Tier 1 (CT1). Most banks had an equity base of around 6%. Although  this was low, the most prominent failures were caused by a shortage of liquidity, not capital. This was the case at Northern Rock in the UK, IKB in Germany and Lehman Brothers in the US. Same picture two weeks ago at franco-belgian Dexia. Nevertheless capital remained a key focus of the various banking reforms and that was of course also correct. The effect is, that today the average bank has a CT1 of 9%, many arrive even in the double digit area. But nobody seems to take notice of that. 
So Ladies and gentlemen: How much capital would be appropriate? This not a scientific question, but it depends on two factors: the political and the market sentiment. Many politicians would like to make banks so robust, that they cannot fail anymore. In such a scenario banking cannot be anymore a profitable business and should therefore - as a consequence - be socialized. And the markets? If they really see a benefit of higher CT1 ratios can be doubted. If that would be the case the Swiss banks UBS and CS (with CT1 over 15%) would structurally over perform the likes of Deutsche or Barclays, which is not the case. 
2. So - if its not capital - what are the real problems surrounding banks?
The flawed stress tests have shown, what's the key question: it is the reliability of sovereign debt. All banks have more or less large amounts of sovereign debt on their balance sheets. Italian banks have Italian treasuries, French banks bonds of the French government. Most of them have also some sort of troubled peripheral debt, Greek or Portuguese in their books. How much are these holdings worth? It makes a huge huge difference, if these bonds are considered risk free or have to be discounted by - say 50%. No capital base, even the highest, could not withstand in that case. But: on what depends the value of sovereign debt. This is exclusively a political question. If Europe guarantees seriously with all it's firepower for example Italian and Spanish debt, it suddenly becomes risk-free. If not, it should be marked to market, Billions of losses would depress the banks threatening the recovery. I have the feeling, that the governments - overall the German - prefer to talk about banks capital ratios while they should absolutely focus on the question of sovereign debt.

Financial Crises 2.0 ante portas

We are definitely back in the dark days of the autumn 2008. That was my strong feeling, when the news about the life-threatening funding and liquidity crises of Dexia broke. The Franco-Belgian bank will be split up now, toxic assets will be put into a "bad bank", the governments have provided a state-guarantee for the lender. But who cares about that? The shares have more or less halved their value. And nobody believes, that Dexia can survive in it's current form.
The real problem is not Dexia. The real problem is, that Dexia represents just the first European bank in this new phase, the Financial Crises 2.0. We are staring in the abyss. Who's next? All banks with a similar model - fund short term, lend medium-long term - are now eyed with extreme mistrust. That was already one of the main reasons for the first round of collapses in 2008/2009,  like Northern Rock and Hypo Real Estate. The fact, that sovereign debt from the periphery plays nowadays more or less the same destabilizing role as CDO's and similar structured credit in the first phase, makes all banks with a portfolio of Greek, Spanish or Italian bonds, like Dexia,  extremely vulnerable. The parallels between October 2008 and October 2011 look embarrassing. 
I'm sure that the Financial Crises 2.0 cannot be resolved simply by propping up the capital of the European banks. That would be only the right method, if capital strength would be the key weakness of the system. But: the equity base today is already far far stronger than it was in 2008. Markets don't take notice of that. No! The real problem once again is funding and liquidity and the underlying issue is the lack of trust in banks and peripheral European sovereign debt. 
Instead of wasting time discussing about the capital of the banks, the Finance Ministers should discuss seriously about leaving the trust crises once for good behind us.