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Yves Logghe/AP

Barroso's banking plan could mean more countries opting for bailout

Jose Manuel Barroso wants banks to increase capital – saying governments can foot the bill by borrowing from the EFSF.

JOSE MANUEL BARROSO has announced plans forcing the Eurozone’s biggest banks to raise billions in capital to better withstand market turmoil – and says banks should not be allowed to pay out dividends or bonuses until they have met the new standards.

Barroso presented the proposals on bank capital as part of a broader plan to tackle the currency union’s debt troubles, which has dragged on for close to two years.

Barroso said if banks can’t raise the necessary capital on the market, they should get help from governments, who in turn can ask for money from the eurozone bailout fund.

The fear gripping the financial sector now is that European banks could take big losses on bonds they own from governments with shaky finances, like Greece.

That uncertainty is stifling lending — both between banks and to the wider economy — which threatens to throw the 17-nation eurozone into a new recession.

Shares in the banks, and the value of the euro, surged after Barroso announced his proposals, continuing a weeklong rally triggered by hopes that the eurozone may finally get a grip on the worsening debt crisis.

Under the new rules, systemically important banks in Europe will have to implement the new Basel III rules on bank capital much earlier than 2019, as was initially foreseen.

That means the continent’s biggest banks have to bolster the financial pad they maintain to absorb losses to about 9 percent of their loans, investments and other risky assets, one insider told AP – compared with the 5-6 per cent buffer needed to pass this summer’s stress tests.

The person did not say when the new capital levels would have to be reached, saying only that it would be “substantially earlier” than 2019. The person was speaking on condition of anonymity because the European Banking Authority won’t disclose the new standards until next week.

The European Commission hopes European leaders will embrace its suggestions at a crucial summit in two weeks time, which has already been postponed from next week.

Officials believe that summit may be the leaders’ last chance to solve the debt crisis before it spins out of control. By revealing its plans ahead of that meeting, the Commission sought to pile more pressure on national governments to adopt radical action.

To assess banks’ capital needs, Barroso said their exposure to all sovereign debt should be taken into account “in a transparent way.”

In its full proposals, the European Commission, the EU’s executive arm, asked for a “prudent valuation of all sovereign debt, whether in the banking book or the trading book” of banks.

This is a significant change in practice from July’s stress tests, when banks had to take writedowns only on bonds in their trading books, where they hold assets they could sell at any time.

EU delays leaders’ summit to finalise debt crisis plan >

Government falls as Slovakia rejects Eurozone bailout expansion plans >

Associated Foreign Press
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