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.”
Wall Street surged 4 per cent in the final hour of trading after this FT report was initially published.
The S&P rebounded from a loss of 1.8 per cent to close up 2.3 per cent at 1,123.94 and averted closing in official bear market territory. Bank stocks led the rebound with the S&P financials index rising 4.1 per cent and reversing an early drop of 2.9 per cent. The UK’s FTSE 100 had earlier dropped 2.6 per cent, closing at 4,944.
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 proven 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.