There's a part of me that feels sorry for Patrick Neary

There is a (very) small part of me that feels sorry for Patrick Neary, the much-pilloried ex-regulator of Ireland's financial system. We are all banking experts now; we all understand how banks work, how to read their accounts and how to judge appropriate lending practices, set the right capital and leverage ratios as well as pronounce on proper reserve requirements. We seem to believe that all of these things are straightforward and that regulation must, therefore, be a very simple matter. Bankers, we know, are greedy and slightly dim so so the idea that they can outwit the regulators is risible.

Some banks did it in a very complicated way, others managed it very simply. But the demise of the banks was all about leverage. Of course, we all know, now, what leverage is and how there was too much of it around before the financial crisis. The Irish banks did it the old fashioned - simple and obvious - way, which is why we can’t feel too sorry for the regulator.

Banks achieve leverage by borrowing and lending other people’s money. Sounds simple and should be easy to measure. It was possible to spot that the Irish banks were highly leveraged but, for various reasons, it was impossible to pin down an exact measurement. It still is.

We want banks to continue to lend (preferably lots more, preferably to SMEs) but we would also rather they do it with their own money (which means their shareholders’ money) rather than using deposits. When banks lend out their depositors cash that’s leverage. If, on the other hand, they are lending money given to them by shareholders, that’s not leverage. So, regulators are trying to get banks to reduce leverage - reduce risk - by forcing them to raise more capital from private investors. Of course, bankers can reduce leverage very simply, without asking shareholders for money: they just stop making loans. Guess which is easier for a banker to do?

Most European banks have slowed down (or even stopped) lending. One of the reasons why we are going to get a very minor easing of monetary policy next month is that the aggregate bank lending data for the euro area is extremely alarming. Lending has collapsed to negligible or, on some measures, negative rates. If you ask banks to deleverage, that’s what happens.

Some banks are asking shareholders for new capital. Deutsche Bank is a contemporary case in point, with plans for a € 6.3bn capital raise. Or is that € 11bn? It all depends what we mean by capital: there is to be a rights issue (which we all agree counts as pure capital), another slug of shares allocated to the Qataris and around € 3bn from instruments called 'additional Tier 1 capital notes'. All-in, we seem to have € 11bn of new money, all set to deleverage Deutsche Bank. Will they lend this new money to Europe's SMEs? Or will it just be set aside for a rainy day?

One reason why this will probably end up as rainy day reserves is that Deutsche Bank starts this capital raise with only € 35bn of capital (of the Tier 1 variety - there are lots of different types of capital). The value that the stock market attributes to this pure capital is around € 30bn - that’s the stock market holding its nose. One reason why investors are wary is that it is only a year since Deutsche Bank did something similar, albeit on a smaller scale. Just over 12 months ago the bank sold 90 million new shares to raise a shade under € 3bn.

That € 35bn of capital needs to be set against loans that Deutsche has made of just over € 1.5 trillion. That’s an extremely leveraged bank taking action to become slightly less extremely leveraged. To add to the complexity, consider these remarks from Bloomberg’s banking analyst Matt Levine: “…don’t totally believe these numbers as they mix different accounting systems. There is no real answer to how levered Deutsche Bank is, only a series of answers determined by different rules”.

Deutsche Bank is an extreme example of leverage, of the risks still posed by one bank. But virtually all Europe’s banks face the same problem: they need to get leverage down. At the same time, including in Ireland, politicians keep yelling at them to increase lending.

Complexity is the enemy here. Solutions to this problem can be found but the debate gets lost in a fog of accounting definitions and other misunderstandings. That complexity contributed to the mess in the first place. Instant experts merely add to the problem.

No doubt everyone involved in the forthcoming banking enquiry understands all of this.