EU works on banks, Obama urges swift action

BRUSSELS/BERLIN Thu Oct 6, 2011 5:13pm EDT

U.S. President Barack Obama gestures during a news conference at the White House in Washington, October 6, 2011. REUTERS/Jason Reed

U.S. President Barack Obama gestures during a news conference at the White House in Washington, October 6, 2011.

Credit: Reuters/Jason Reed

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BRUSSELS/BERLIN (Reuters) - European Union moves to shore up ailing banks moved into higher gear on Thursday as President Barack Obama urged European leaders to act faster to tackle a sovereign debt crisis that threatens global economic recovery.

The EU's executive arm said it would present a plan for member states to coordinate a recapitalization of their banks, as regulators met in London to reassess the capital buffers of stressed lenders that received a clean bill of health in July.

The European Central Bank threw a lifeline to commercial banks by turning up its liquidity pumps to provide longer-term cheap money for the growing number of European lenders which have seen wholesale funding dry up as market confidence ebbs.

The moves came amid fears that Greece, the most heavily indebted euro zone state, may default within months, setting off a chain reaction of sovereign downgrades and bank failures.

"We are now proposing member states to have a coordinated action to recapitalize banks and so to get rid of toxic assets they may have," European Commission President Jose Manuel Barroso said in a television interview relayed on YouTube.

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

However, a senior EU official told Reuters there would be no common European mechanism to deal with toxic assets, and no joint "bad bank" for Europe.

In a positive sign, the Dutch parliament voted in favor of an enhanced euro zone bailout plan -- leaving Slovakia and Malta the only euro zone members that still must put their legislative stamp of approval on changes agreed last July.

Some 96 of 150 members of the lower house of the Dutch parliament voted to uphold a beefed up European Financial Stability Facility (EFSF).

In Washington, Obama told a news conference that uncertainty about the euro zone crisis was hitting global markets and posed the biggest headwind to the U.S. economy.

Ratcheting up pressure on European leaders, he said he hoped they would have a concrete plan in time for a November 3-4 Group of 20 summit to overcome the debt crisis by creating enough "firepower" to help weaker member states.

Treasury Secretary Timothy Geithner told Congress in prepared testimony: "The critical imperative is to ensure that the governments and the financial systems under pressure have access to a more powerful financial backstop."

In the first case of a bank felled by the crisis, Franco-Belgian municipal lender Dexia's board will vote on a break-up plan on Saturday as the French and Belgian governments argue over how to split the cost to the taxpayer.

Barroso would not speculate on how much money would be needed for recapitalization across the 27-nation bloc but his comments helped push European shares up 2.4 percent on the day as investors welcoming signs of action.

The ECB disappointed some investors by leaving interest rates unchanged at 1.5 percent, on a split decision, despite signs of a sharp slowdown in the European economy. But it compensated with a raft of measures to boost liquidity.

ECB President Jean-Claude Trichet announced after chairing his final monetary policy meeting before retiring that the ECB will provide unlimited one-year funding in two operations and revive its policy of buying covered bonds for up to 40 billion euros.

SAME FATE?

German Chancellor Angela Merkel said Europe should not hesitate to recapitalize its banks if this prevents greater economic damage, and leaders would take very seriously expert advice that the time was ripe for such a step.

Jean-Claude Juncker, chairman of euro zone finance ministers, said banks in need of capital should turn first to the markets, then to national governments and as a last resort to the euro zone's rescue fund.

Some officials fear other lenders could suffer a similar fate to Dexia, even though they passed the European Banking Authority's (EBA) July stress test of 91 banks in the EU.

Those tests concluded that only eight banks failed and that they needed a collective 2.5 billion euros ($3.3 billion) -- a fraction of the up to 200 billion euros the International Monetary Fund believes EU banks require.

The EBA, which set the criteria for the tests carried out by national regulators, held the second day of a board meeting to review banks' capital needs based on the same data which formed the basis of those tests.

If the banks were forced to mark sovereign bonds holdings to current market prices, 18 would fail with a total capital hole of 40 billion euros, according to a Reuters Breakingviews stress test calculator.

EU Competition Commissioner Joaquin Almunia said there was a need to reassess bank assets, especially sovereign debt, to promote recapitalization, but public money should be used only as a last resort and in line with the bloc's state aid rules.

The EBA is preparing the ground by determining which lenders should be included in any coordinated recapitalization that its members would oversee. The European Commission has no power to impose a recapitalization plan on EU states.

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 UK banking industry official said.

The EBA, made up of regulators and central bankers from EU member states, said it was asked by the European Systemic Risk Board last month to "coordinate efforts to strengthen bank capital.

It is under pressure after its chairman, Andrea Enria, admitted on Tuesday that this year's stress test, which Dexia passed with flying colors, failed to reassure investors.

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

(Additional reporting by Alister Bull, Dave Clarke and Rachelle Younglai in Washington, Huw Jones in London, Philip Blenkinsop and Jan Strupczewski in Brussels; Writing by Paul Taylor, editing by Mike Peacock, Ron Askew, Chizu Nomiyama)

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Comments (13)
DrJJJJ wrote:
Europe and the US need to make the mental adjustment that our economies will be slow or in decline for years becuase of Big government, big debt and poor morals/ethics/greed!! By planning for it (instead of some pie in the sky recovery) we take a more realistic approach to solutions! Greed and big debt are not good-the results are in! Those that promote greed or debt need to go find another job-Vegas needs a few more greedy men FYI! Also, pesnion funds/etc that are counting on 4+% rate of return with no risk are gambling with our futures! Capital preservation is the name of the game now-can you keep what you have!

Oct 06, 2011 11:21am EDT  --  Report as abuse
Ashishnfl wrote:
Little Tim’s ” Significant Risk ” means his banker and wall street friends won’t be able to pull in enough dough of profits if European tax payer funded bailout to french banks on which US banks have significant exposure even Helicopter Ben Bernanke is ready to print more dough and loan it to euro banks in ECB fails. Round and Round we go to make the dough from euro or us tax payer. crony capitalism 101!

Oct 06, 2011 12:15pm EDT  --  Report as abuse
Butch_from_PA wrote:
Pure and straight forward robbery.

There is no more democracy. This is financial feudalism. Where all world financiers control finance and funds to do incredibly risky deals worldwide with total government and tax payers backing. They have no risk – you pay for their mistakes.

Mega mega profits and arrogance at peasant expenses. You can and will fail. Banks can never fail and it is your duty to feed them and make sure they live a good life. Your children’s future is not as importance as their profits and ability to stay afloat.

Oct 06, 2011 1:51pm EDT  --  Report as abuse
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