UPDATE 2-EU Commission extends bank aid rules, cites market tensions

Thu Dec 1, 2011 8:01am EST

* EU's Almunia says market tensions prompts move

* Looser guidelines designed to make it easier to assist banks

* Revisions come into effect from January

* Guarantee fees paid by banks expected to fall 0.2 pct

By Foo Yun Chee and John O'Donnell

BRUSSELS, Dec 1 (Reuters) - European Union regulators extended looser rules allowing governments to bail out troubled banks until market conditions improve, citing the sovereign debt crisis and banks' resulting funding difficulties for the move.

New guidelines, valid from Jan. 1, will make it easier for governments to help struggling banks as the 27-country EU grapples with a credit squeeze, a capital shortfall and the sovereign debt crisis.

"My intention had been to put an end to the crisis regime... this month," EU Competition Commissioner Joaquin Almunia told a news conference on Thursday, adding the rules had already been extended by 12 months until the end of 2011.

"But since last summer I was obliged to change my mind, given the stronger tensions in sovereign debt markets and the transmission of those tensions to interbank markets and to the funding conditions for banks."

The rules were introduced during the credit crisis in 2008 for lenders that received a capital injection or transferred loans into so-called "bad banks".

Under some revisions, the fees paid by banks for guarantees on their liabilities will reflect their intrinsic risk, rather than their country's risk or market conditions, the Commission said.

The average price for a guarantee will be about 1 percent, including a minimum fee of 0.4 percent. The terms apply to bonds with a term of 1-5 years or 7 years for covered bonds.

The Commission said it expected guarantee costs to fall about 0.2 percent due to the new pricing policy, adding it also expected banks would increasingly use shares rather than cash to remunerate the state for support.

Lenders benefiting from recapitalisation or other support will still need to restructure to win regulatory approval and banks that are "heavy users" of state guarantees will need to show they are viable.

Almunia said he would have preferred a mutualised or pooled system of EU state guarantees for banks seeking to borrow.

But the bloc's finance ministers decided on Wednesday to leave it to individual member states to back their banks alone, a move that will do little to lift confidence in struggling financial institutions based in countries too weak to help them.

EU governments injected 1.6 trillion euros ($2.15 trillion)into the financial sector via state guarantees, recapitalisation and impaired asset and liquidity measures between October 2008 and December 2010, Commission data showed. That was equivalent to 13 percent of the region's gross domestic product.

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