European Union finance ministers will consider a three-pronged plan to restore investor confidence in the region's banking sector as part of wider efforts to stabilise euro zone finances, EU sources familiar with the situation said.
Finance ministers believe that focusing on capital levels alone may not be enough to put banks on a firmer footing and that other investor concerns need to be addressed as well.
"This has to be a complete package," one EU source said on condition of anonymity.
People familiar with the options EU finance ministers will consider say a three-pronged approach is emerging:
- A basic minimum capital requirement for banks in the EU that is substantially higher than the 5 per cent "pass mark" in the July stress test of 90 banks;
- An additional, temporary buffer on top of the new minimum requirement for those banks that have exposure to troubled euro sovereign debt. This does not necessarily mean banks would have to take full market writedowns to hit profits straight away;
- Ensuring that banks have adequate "term" funding, even if it means state-backed guarantees.
EU finance ministers would set the levels and a clear timescale for reaching the minimum capital levels and having funding guarantees in place, if needed, the EU source said.
The three-pronged approach would help tailor the response to individual banks as the sovereign debt "buffer" would be set at zero for some, and not all lenders would need funding guarantees.
A global accord known as Basel III is being phased in from 2013 to introduce minimum core capital requirements of 7 per cent by the start of 2019.
"The way to address the problem is we have to overshoot the regulatory minimum requirements on capital," one source said.
France's government spokeswoman said today that European governments would ask banks to achieve a 9 per cent capital ratio by 2013 as part of a comprehensive package to draw a line under the euro zone's debt crisis.
"We will ask all European banks to have 9 per cent capital ratios by 2013 to be more solid to face risk," Valerie Pecresse told RMC radio.
The quality of the higher basic capital would have to be at least as good as that accepted for core Tier 1 calculations in the July EU stress test.
It is unclear whether the extra buffer at banks exposed to the sovereign debt of troubled euro zone countries will have to be of equally high quality or could also comprise hybrid debt.
Banks could be required to convert debt into equity or, if that is not possible, national governments would have to step in to provide a "backstop", a commitment EU states made on paper ahead of the July stress tests.
Reuters
