E.U. Tells Banks to Garner Bigger Reserves

Under proposals outlined by the European Commission president, José Manuel Barroso, banks would be required to boost temporarily their protection against losses as part of a comprehensive plan to restore waning confidence.

Mr. Barroso also called on the 17 euro zone nations to maximize the capacity of the their 440 billion euro bailout fund – a clear hint that he favors a leveraging of the backstop so as to increase its firepower up to as much as 2 trillion euros.

The euro zone is entering a critical countdown, with investors in financial markets expecting an E.U. summit meeting Oct. 23 and a meeting of leaders of the Group of 20 leading economies Nov. 3 to endorse major decisions to help resolve the region’s debt crisis.

However, after tough negotiations inside the European Commission, the plan put forward Wednesday did not put a figure on the capital reserves that would be required.

On Tuesday Alain Juppé, the French foreign minister, told the National Assembly that several leading French banks — like BNP Paribas, Crédit Agricole and Société Générale — that are deeply exposed to the sovereign debt of Greece and other south European countries would move to increase their capital reserves, initially by using their own revenue or through the financial markets. Money from the government would be drawn upon only as “a last resort,” he said, according to Reuters.

Mr. Juppé said the move, which was agreed upon with Germany during talks Sunday, meant that the banks’ best buffer against losses — so-called core Tier 1 capital — would increase to 9 percent or more, from 7 percent, by 2013.

The European Banking Authority has also suggested a 9 percent floor, according to E.U. officials. The authority declined to comment Wednesday on the figure.

Mr. Barroso’s plans are designed to help set the agenda for the Oct. 23 summit meeting of E.U. leaders, a gathering that was delayed nearly a week to provide more time to find ways to tackle the crisis.

With the euro zone’s bailout fund of €440 billion, or $606 billion, due to gain new powers to help recapitalize banks, the issue of whether to use it has divided France and Germany.

France fears that it could lose its AAA credit rating if it has to inject billions of euros in taxpayer money into its banks. That would be a huge political setback for the French president, Nicolas Sarkozy, who faces a re-election campaign next year.

But Berlin is reluctant to use European funds to recapitalize banks that compete with its own financial institutions.

Article source: http://feeds.nytimes.com/click.phdo?i=c4f41bc6aa7bafaa0cdd0b30cd6e7a6b