EC unveils bank debt crisis plan

Banks in Europe should temporarily raise their capital reserves to help withstand market turmoil over the continent’s debt, European Commission president Jose-Manuel Barroso has said.

Unveiling the Commission's latest plan to boost the health of Europe's ailing banks, Mr Barroso said key European lenders should not be allowed to pay out dividends or bonuses until they have raised their capital buffers to the new standards.

The fear gripping the financial sector now is that 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 euro zone into a new recession.

Mr Barroso did not give a specific figure for the new capital buffers but the full proposals, published on his website after his speech, suggested his proposal could require an accelerated implementation of new international rules on bank capital, the so-called Basel III rules.

Those rules increased the amount of low-risk assets that banks had to hold to back up their lending and investments, in order to decrease the chances that banks could fail in turbulent times.

A spokesman for Mr Barroso said it will be up to the national banking supervisors, together with the European Banking Authority, to define when the higher capital ratios have to be attained, how long they have to remain elevated and set the precise ratio.

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

The Commission also asked for a “prudent valuation of all sovereign debt, whether in the banking book or the trading book” of banks.

The international body that sets accounting standards recently complained that many banks were not taking adequate writedowns on bonds that they plan to hold until they mature.

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

He also called for a permanent bailout fund, the European Stability Mechanism, to come into force in mid-2012, one year ahead of schedule. The stability mechanism, in contrast to the current bailout fund, requires private investors to take losses on government bonds if a nation needs to write off some of its debt load.

He also lobbied for bigger powers for the EU’s monetary affairs commissioner, which would give him more influence over national budgets.

Dublin Labour MEP Proinsias De Rossa said he agreed "100 per cent" with what Mr. Barroso proposed.

"I am however deeply disappointed that he did not make a single mention of the social

impact of the crisis, and the need to maintain and develop a social Europe as a key element in resolving the credibility and growth and crisis," he said.

Mr De Rossa called on Taoiseach Enda Kenny to make it clear in his meeting with Mr Barroso tomorrow that Ireland "supports the need for ‘more Europe’ to address the euro zone crisis, and remind him that Europe is about building a social market economy and not simply creating a comfortable place for market speculators".

AP