Under proposals outlined by the European Commission president, José Manuel Barroso, banks would be required to temporarily bolster their protection against losses as part of a plan to restore waning confidence.
Mr. Barroso also called on the 17 European Union members that use the euro to maximize the capacity of their 440 billion euro ($600 billion) bailout fund — a clear hint that he favors leveraging the rescue fund to increase its firepower to as much as 2 trillion euros ($2.8 trillion).
Leveraging the fund was advocated by the United States treasury secretary, Timothy F. Geithner, to ensure that troubled European countries had access to affordable financing as they tried to reduce their debt.
The Treasury Department pressed that point on Wednesday during a briefing ahead of a meeting of finance ministers of the Group of 20 on Friday and Saturday in Paris, which Mr. Geithner will attend.
Europe needs “a firewall that has the resources and capacity” to ensure that the crisis that started in Greece does not spread to bigger countries, Lael Brainard, the Treasury under secretary for international affairs, said at the briefing. The euro zone is entering a critical countdown, with investors in financial markets expecting European officials at a summit meeting on Oct. 23 and leaders of the Group of 20 at on Nov. 3 to endorse plans to resolve the region’s debt crisis.
On Wednesday, Slovakia reversed course and struck a political deal that should ensure approval of the bailout fund, the 17th and last vote required. European officials, who had been watching closely, greeted the breakthrough with a mixture of relief and frustration and were able to turn their attention to the banks.
Extra capital for European banks should be raised first from the private sector, then from national governments, according to the proposal. Only when those avenues have been exhausted should a euro zone bailout fund be tapped, it said.
Banks should not be allowed to pay dividends or bonuses until they have raised the additional capital, according to the proposal.
The plan put forward Wednesday did not put a figure on the capital reserves that would be required. That omission contrasted with the more specific plans circulating in France and among European banking regulators for a minimum capital reserve of 9 percent of assets.
Internally, the European commissioner responsible for financial services, Michel Barnier, argued that the new floor for capital should be set by the European Banking Authority, not the commission, said one European official, who spoke on the condition of anonymity because of the confidential nature of the government discussions.
On Tuesday, Alain Juppé, the French foreign minister, told the French National Assembly that several leading French banks that were deeply exposed to the sovereign debt of Greece and other Southern European countries — like BNP Paribas, Crédit Agricole and Société Générale — 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, known as core Tier 1 capital, would increase to 9 percent or more by 2013, from 7 percent now.
The European Banking Authority has also suggested a 9 percent floor, according to European Union officials. The agency declined to comment on the figure Wednesday.
The document released Wednesday by the European Commission called for “a temporary significantly higher capital ratio of highest-quality capital after accounting for exposure” to sovereign debt in systemically important banks.
One European official said that the recapitalization proposal essentially meant that banks were likely to have to meet the requirements laid down under the so-called Basel III international standards for banks more quickly than first expected, although temporarily. Instead of reaching the specified level of capital by 2019, these goals will have to be reached “within months,” said the official, who spoke on condition of anonymity.
Ms. Brainard of the United States Treasury Department said that while Europe had finally come around to the idea that its banks need more capital in case the crisis worsened, “it’s still one piece of several actions that need to happen as part of a comprehensive plan” to prevent contagion from a Greek default or worse.
After Lehman Brothers failed in September 2008, the United States took swift action to ensure its banks had a strong cushion of capital, a move that Ms. Brainard said restored confidence and helped the banks turn around relatively quickly.
“At the time, it was seen as a risky endeavor, but it turned out to be just the medicine the market needed,” she said. “The same logic lies behind Europe’s efforts.”
On Wednesday, Mr. Barroso argued for the quick release of 8 billion euros in loans to Greece from international lenders, without which the government in Athens could default within weeks.
With the euro zone’s temporary bailout fund, the European Financial Stability Facility, set to gain new powers to help recapitalize banks, the issue of whether to use it has divided France and Germany. Mr. Barroso called for the early introduction — next year if possible — of the permanent euro zone bailout fund that is to replace the facility in 2013.
France fears that it could lose its triple-A credit rating if it has to inject billions of euros in taxpayer money into its banks. That would be a huge political setback for 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.
Liz Alderman contributed reporting from Paris.
Article source: http://www.nytimes.com/2011/10/13/business/global/eu-set-to-tell-banks-to-garner-bigger-reserves.html?partner=rss&emc=rss
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