EU considers bank rescue plan

Olli Rehn, EU Commissioner for Economic and Monetary Affairs, speaks during a seminar in September in Washington.

Story highlights

  • European Union finance agreed that additional measures were urgently needed to shore up the region's banks
  • "There is a sense of urgency among ministers and we need to move on" -- Olli Rehn, European commissioner for economic affairs
  • European markets rallied on Wednesday following the FT report.
European Union finance ministers are examining ways of co-ordinating recapitalisations of financial institutions after they agreed that additional measures were urgently needed to shore up the region's banks.
Although the details of the plan are still under discussion, officials said EU ministers meeting in Luxembourg had concluded that they had not done enough to convince financial markets that Europe's banks could withstand the current debt crisis.
"There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states," Olli Rehn, European commissioner for economic affairs, told the Financial Times. "There is a sense of urgency among ministers and we need to move on."
"Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty," Mr Rehn said. "This should be regarded as an integral part of the EU's comprehensive strategy to restore confidence and overcome the crisis."
European markets rallied on Wednesday following the FT report. Banks were among the biggest gainers, with the heavily sold French institutions leading the way. BNP Paribas, France's biggest bank by market capitalisation, jumped 6 per cent, Crédit Agricole was up 6 per cent and Société Générale advanced 5 per cent.
The broader Eurofirst 300 was up 1.6 per cent and the FTSE 100 gained 1.1 per cent.
Overnight, Wall Street surged 4 per cent in the final hour of trading, led by gains for bank stocks, but Asian stock markets failed to follow and closed lower again.
A downgrade of Italy's government bond rating by Moody's did nothing to dent the optimistic mood among European investors amid hopes plans to tackle the debt problems in the euozone are under way.
In a sign that European governments were preparing to act, Wolfgang Schäuble, the German finance minister, said Berlin could, if necessary, reactivate support mechanisms it put in place in 2008 to recapitalise the banks. The mechanisms had expired and the German government had until now insisted they were not needed.
"Everyone said the big concern is that worrying developments on the financial markets will escalate into a banking crisis," Mr Schäuble said at a press conference.
Some of the biggest banks in France, Germany and Belgium hold tens of billions of euros in sovereign bonds from struggling peripheral eurozone countries, which have seen their bond values plummet amid fears Greece is close to defaulting on its debts.
George Osborne, Britain's chancellor, said: "It's clear now that the European banking system needs to be strengthened and needs more capital."
Markets have been unsettled again this week by troubles at Dexia, the Franco-Belgian lender, which holds €3.5bn in Greek bonds and €15bn in Italian bonds and has been struggling to raise enough short-term cash to run its day-to-day operations.
The French and Belgian governments said they would take "all necessary measures" to prop up Dexia.
The mounting concerns over a Greek default sparked a sharp fall in banking stocks and a flood of money into US Treasuries and German Bunds.
Deutsche Bank, Germany's biggest lender, saw its shares fall 4.3 per cent after the company cut its 2011 profit forecast and announced 500 job cuts.
Some European officials had hoped to avoid a large-scale effort to shore up eurozone banks until the bloc's €440bn bail-out fund is formally given powers to recapitalise financial institutions in countries not covered by bail-out programmes.
But the process of getting the fund new powers has proved slower than expected, with three countries -- including Slovakia -- yet to approve the EFSF's overhaul. Because the EU risked being overtaken by events, Mr Rehn said finance ministers meeting in Luxembourg agreed on the need to act through national capitals while co-ordinating their approach.
A first step would likely be to ensure all countries have mechanisms in place to prop up their banks.
Mr Rehn cautioned that while there was "no formal decision" to begin a Europe-wide effort, co-ordination among EU's institutions -- including the European Central Bank, European Banking Authority and the European Commission -- on necessary measures had intensified.
Finance ministers left open the exact means of how the recapitalisation could be co-ordinated.
One option being examined is to set a new higher capital requirement for banks that went through an EU stress test last summer. The Commission and the European banking authorities working up that plan among other variants of a stress test.
Other member states argued more forcefully for national regulators to take the lead and recapitalise weak institutions on a bank by bank basis.