Europe's banks risk fragmenting the financial market as they shed more assets in a bid to meet higher minimum capital levels by June, the European Union's banking regulator said today.

"There is a danger that deleveraging of the EU's banking sector could leave us with a more segmented financial market," Andrea Enria, the chairman of the European Banking Authority, told a banking conference attended by European financial regulators in Brussels.

The EU is turning a global accord on bank capital, known as Basel III, into EU law but some countries want greater flexibility, arguing that not all of the region's 8,000 lenders have the same business model.

In December 2011, the EBA asked European banks to boost their capital base by a combined €115 billion.

The Basel agreement asks banks to hold core capital equivalent to at least 7 per cent of their risk-weighted assets by 2019.

The EBA expects banks to hold a core capital buffer of 9 per cent by the end of June this year.

Mr Enria said Central and Eastern European banks had reined in their lending, leading to a retreat to national markets.

Last year the Austrian central bank, for example, restricted lending by banks under its jurisdiction to Eastern European countries.

Mr Enria said he believed one way to address the problem of choked-off bank lending would be to set up a pan-European facility that could lend directly to banks - allowing them to access financing without having to go through national governments.

That contrasts with the European Financial Stability Facility, the euro zone bailout fund tapped by the governments of Greece, Portugal and Ireland to deal with the financial crisis.

Reuters