October 6, 2011 / 3:18 PM / 7 years ago

EU exec pushes for joint bank funding boost

BRUSSELS/LONDON (Reuters) - The European Union executive flagged plans for a coordinated injection of funds into the region’s banks as regulators met to reassess the resilience of stressed lenders amid fears others might face the same fate as debt crisis victim Dexia.

“We are now proposing member states to have a coordinated action to recapitalized banks and so to get rid of toxic assets they may have,” European Commission President Jose Manuel Barroso said on Thursday in a television interview relayed on You Tube.

It was the clearest statement yet from a top EU official on joint action to help restore confidence in a banking sector that is increasingly being shunned by investors and foreign lenders as the euro zone debt crisis deepens.

Barroso did not say how much money was needed, nor how such recapitalization would work, but his comments boosted hopes — first raised by similar remarks from politicians and officials this week — that Europe had a plan to prop up weak lenders.

European shares initially jumped almost 2 percent .FTEU3 on the comments while the euro climbed against the dollar.

Work on the plan to help banks deal with what Barroso called “toxic assets” continued, a Commission spokesman said.

“Proposals will be made to member states, and when ...they have been finalized, they will be announced,” the spokesman told reporters.

As the European Union’s executive promised action, Belgium sought to reassure depositors in Franco-Belgian bank Dexia (DEXI.BR) that their savings were safe.

Some officials fear other lenders could suffer a similar fate to Dexia, heavily exposed to default-threatened Greece and hurt by a creeping freeze on interbank lending despite being given the thumbs-up in “stress tests” by the European Banking Authority (EBA) in July.

Those tests failed only eight banks and put the total bill for repairing their balance sheets at 2.5 billion euros ($3.3 billion) — a fraction of the 200 billion euros the International Monetary Fund (IMF) believes EU banks require.

“Dexia is just one particular case, but we may have other particular cases that were not identified as being in a vulnerable position in July, but because of the developments in sovereign debt markets may find themselves in that category,” an EU official said.

The European Central Bank sees “intensified” threats to the euro zone economy and will provide struggling banks with longer-term liquidity to ward off a new credit crunch, President Jean-Claude Trichet said on Thursday after the bank kept rates unchanged at 1.5 percent.

The region’s finance ministers discussed the situation when they met this week, but did not agree on any plan to recapitalize, the official added, cautioning that there was “no such plan” as markets expect.

A second EU official told Reuters there would be no common European mechanism to deal with toxic assets and no joint “bad bank.”

The European Commission has no power to impose a recapitalization plan on EU states and is in a weak position to force countries to coordinate.

Until now, both France and Germany, whose support is decisive in agreeing a single approach, have been reluctant to recapitalize their own banks.

The Commission does, however, have influence as the bloc’s competition and state aid regulator, a role that allows it to break up banks, force their sale or demand they be dismantled.

Its antitrust chief, Joaquin Almunia, said on Thursday there was a need to reassess banks’ capital cushions to reflect their holdings of sovereign debt but that they should only get taxpayer money as a last resort.


The EBA, which concludes a two-day meeting on Thursday, said it was examining the resilience of lenders’ safety nets against the backdrop of the “current situation.”

“The EBA is reviewing banks’ capital positions,” the authority said in a statement.

Many banks are facing severe funding pressures due to market worries about their exposure to government debt from Greece and other peripheral euro zone countries.

The EBA is preparing for a possible recapitalization by determining which lenders should be included.

Markets and industry officials say the key missing piece is whether enough money can be found, fast enough, to fund a recapitalization plan and stop contagion from Greece or Dexia.

“The euro zone knows what it needs to do and should just get on with it,” a British banking industry official said.

The EBA said it has not announced a new round of stress tests and there are no updates to the figures on sovereign debt and other bank exposures it published in July.

The banking authority, made up of regulators and central bankers from EU member states, said it was called on by the European Systemic Risk Board last month to “coordinate efforts to strengthen bank capital.”

The EBA is under heavy pressure after its chairman Andrea Enria admitted that this year’s stress test, which Dexia passed with flying colors, failed to reassure investors.

A senior bank adviser said the EBA, as an internal exercise, may test banks twice a year to assess the impact of pricing their sovereign debt at the going rate, known as marking-to-market.

Some banks have come under heavy criticism for not updating investors clearly on the value of their government debt and bumping up capital buffers to cover markdowns.

($1 = 0.751 Euros)

Reporting by Huw Jones in London, John O'Donnell in Brussels and Philipp Halstrick in Frankfurt; Editing by Ruth Pitchford/John Stonestreet

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