October 6, 2011

Coordinate EU Bank Recapitalization: Barroso

Action considered to restore confidence in banking sector

Regulators from the European Union were presented with a proposal to coordinate recapitalization of its banks at the second day of meetings on Thursday, as they considered ways to reassure investors who have been fleeing the banking sector.

Reuters reported that European Commission President Jose Manuel Barroso said, "We are now proposing member states to have a coordinated action to recapitalize banks and so to get rid of toxic assets they may have." The European Banking Authority said it was reviewing banks' capital positions as they stand with regard to "the current situation."

While the banking authority has not announced new stress tests nor updated data and results of the July round of tests, those exams have failed to restore confidence in the European banking sector. Dexia, the French-Belgian bank that is expected to be broken up and sold, passed its stress test in that round but has become the focal point for contagion that has spread from Greece to the heart of the eurozone.

It failed to write down Greek debt sufficiently, and has exposure to Spanish, Portuguese, and Italian bonds as well—all troubled assets that put its capitalization at risk. Bloomberg reported Thursday that Dexia investors may be left with nothing once the troubled bank's assets are disposed of.

The banking authority, which consists of regulators and central bankers from EU member states, has come under fire over Dexia and last month was told by the European Systemic Risk Board to "coordinate efforts to strengthen bank capital." It is now deciding which lenders ought to be included in a recapitalization move; it would supervise that action.

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