EU in deposit, recapitalization deal as crisis rages

By Anna Willard and Jan Strupczewski

LUXEMBOURG (Reuters) - EU finance ministers, seeking a confidence-booster as the global financial crisis pounded tiny Iceland on Tuesday, agreed to increase the minimum level of bank deposit insurance across the 27 European Union countries.

They also pledged to recapitalize any vital bank if needed to avoid, as France put it, another Lehman Brothers, the Wall Street giant that filed for bankruptcy last month as the worst financial crisis since the 1930s intensified.

The ministers agreed to raise the minimum deposit guarantee to 50,000 euros ($68,000), half of what some wanted but more than double the 20,000 euros that is the floor level now.

They struck the deal as more trouble hit banks following weekend rescues in Germany and the Benelux countries.

Shares in some of Britain's big banks were hit by reports of talks on government cash injections and a source in the British banking industry said more urgent talks would take place in coming days.

British Prime Minister Gordon Brown scheduled an evening meeting with his finance minister, central bank chief and the country's financial regulators, though Brown's spokesman dismissed suggestions it was a "crisis meeting."

Shares in Royal Bank of Scotland (RBS.L) and HBOS HBOS.L plunged nearly 40 percent on the day.

Iceland, which is not in the EU, took over its second largest bank, propped up a battered currency and said it was seeking a 4 billion euro ($5.44 billion) loan from Russia to help tackle a financial crisis threatening to overwhelm it.

RECAPITALISATION PLEDGE

Under pressure from fast-moving events, the EU ministers issued a statement which followed up on pledges by their leaders on Monday to do all it took to protect depositors and ensure the stability of the banking system.

"We all commit to take all necessary measures to enhance the soundness and stability of our banking system and to protect the deposits of individual savers," the statement said.

"To protect the depositors' interests and the stability of the system, we stress the appropriateness of an approach including, among other means, recapitalization of vulnerable, systemically relevant financial institutions," it said.

French Economy Minister Christine Lagarde said: "We're not going to tolerate a Lehman Brothers scenario."

"We will take measures including recapitalization and we're very specific in what we say," Lagarde said. "We'll talk about terms and conditions. We will set down recommendations from the ministers of finance (regarding) under what conditions recapitalization will take place."

Some at least remained somewhat skeptical.