EU Reveals $630 Billion Troubled Bank Backstop

Tuesday, 06 Jul 2010 07:32 AM

 

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European Union countries that discover problem banks when they stress-test their lenders could turn to an existing EU state backup scheme, the bloc's economy chief said.

EU Economy Commissioner Olli Rehn said that should any government exhaust national funds in helping a troubled lender, it could turn to "EU financial backstops ... in the second line of defense."

"In order to use these European financial stability mechanisms in the case of any country we would need to have a program ... focused in particular on the restructuring of the banking sector and addressing the potential needs of a possible recapitalization," Rehn told lawmakers in the European parliament. "That is the strategy."

It is the first time the European Commission or executive has said that countries struggling to recapitalize stricken banks could tap a 500 billion euro ($628.57 billion) scheme set up as a safety net should borrowing problems in Greece spread to Spain and beyond.

By explaining what it would do should "pockets of vulnerability" be uncovered by stress testing, Rehn hopes to win back the confidence of jittery investors.

Many are nervous that wider stress-testing of European lenders could exacerbate problems of a cash-strapped state which is suddenly forced to shore up the finances of one of its banks which fails to come up to scratch. Rehn also partially described one of the test criteria, which has proven controversial.

"We are including the criteria of sovereign debt shock in order to reinforce the credibility of results," he said, without shedding further light on how this would be tested.

Some countries are nervous that placing too high a hurdle for banks in this regard, for example by simulating a default by countries like Greece, could shatter investor confidence.

Rehn said that the testing of banks would now be wider than originally planned. The 27-country bloc had set out to examine just 25 of its biggest banks.

"We are testing more banks including second-tier banks. For instance, regional banks," he said. "This gives a clear and more accurate picture of the resilience of the whole European banking sector."

The European Commission or executive helps set the criteria for testing alongside the bloc's countries and the European Central Bank.

© 2014 Thomson/Reuters. All rights reserved.

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