EU STATES that discover problem banks when they stress-test their lenders could turn to an existing EU state back-up scheme, the bloc’s economy chief has said.

EU economy commissioner Olli Rehn said if any government exhausts national funds in helping a troubled lender, it could turn to “EU financial backstops . . . in the second line of defence”.

“In order to use these European financial stability mechanisms in the case of any country, we would need to have a programme . . . focused in particular on the restructuring of the banking sector and addressing the potential needs of a possible recapitalisation,” Mr Rehn told lawmakers in the European parliament. “That is the strategy.” It is the first time the commission or executive has spelt out that countries struggling to recapitalise banks could tap a €500 billion scheme set up as a safety net, should borrowing problems in Greece spread.

By explaining what it would do should “pockets of vulnerability” be uncovered by stress testing, Mr 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 forced to shore up the finances of one of its banks.

Mr Rehn said the testing of banks would be wider than originally planned. The EU had set out to examine just 25 of its biggest banks. – (Reuters)