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EU official warns of Euro bank fragility

by Renee Cordes in Brussels | Published September 21, 2011 at 1:58 PM

More European banks may need to be bailed out as a result of the debt crisis, the EU's top antitrust official warned Tuesday, Sept. 20, as the European Central Bank bought Italian bonds after a sovereign debt downgrade and Greece continued to hover near default.

"The worsening of the sovereign debt crisis, its impact on a fragile banking system and the continuing tensions in funding markets -- all point to the possible need for further recapitalization of banks on top of the nine that failed the stress tests earlier this year," European Union Competition Commissioner Joaquín Almunia told journalists in Brussels.

For the past few weeks, concern has been mounting that Europe's banks might not have enough capital to withstand an escalating debt crisis that may yet include a Greek default on its sovereign debt.

"Markets fundamentally don't believe that many of Europe's banks hold enough capital," Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, warned in a recent report. "They thus question the solidity of the entire European banking system."

Significantly, Almunia's latest comments are the first by a top EU policymaker calling into question this summer's stress tests conducted on 90 European banks by the London-based European Banking Authority. They also appear to contradict last month's declaration by Olli Rehn, the EU's economic and monetary affairs commissioner, that EU banks "are now better capitalized than they were one year ago."

To mitigate the threat to European banks, Almunia called for extending beyond 2011 the temporary state aid rules for banks that have been in place since the start of the crisis.

Meanwhile, EU competition watchdogs continue to review 19 restructuring plans for troubled European lenders, including Germany's WestLB AG and Bank of Ireland Group.

On Tuesday, the Commission approved Germany's €30 billion ($41 billion) bailout of regional lender HSH Nordbank AG after the owners (the state of Schleswig-Holstein and the city-state of Hamburg) agreed to reduce the bank's balance sheet by 61%, including winding down its aircraft financing unit and reducing its ship financing activities.

Adding to concern about European banks, the International Monetary Fund on Tuesday used its World Economic Outlook to call for additional capital buffers for lenders in the troubled 17-nation euro zone.

"In the euro area, banks must be made stronger, not only to avoid deleveraging and maintain growth, but also, and more importantly, to reduce risks of vicious feedback loops between low growth, weak sovereigns, and weak banks," the IMF said. "This requires additional capital buffers, from either public or private sources."

The capital concerns from the Commission and the IMF come amid fresh signs of the depth of the debt crisis. The European Central Bank on Tuesday stepped in to buy Italian government bonds in a move to drive down spiraling bond yields after a recent sovereign debt downgrade by Standard & Poor's.

Greek Prime Minister George Papandreou is scheduled Tuesday to hold a second conference call in as many days with EU and IMF officials regarding the country's bailout.

The talks come as EU leaders try to  find a way to keep Greece from defaulting on its debt or being forced to leave the euro zone.

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Tags: banking | European Central Bank | European Union | sovereign debt crisis

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