Tuesday, September 20, 2011

European regulators signaling that banks need more capital, but how much more is the question

According to an article in the Independent, European regulators are gearing up to provide more capital to their banks.

Regular readers know that providing more capital without disclosure fails to answer the question of which banks are solvent and which are not.  Like the bailouts of 2009, it leaves open the very real possibility of the markets concluding the banks are still insolvent.

By restarting the downward spiral of relying on public backstops, this recapitalization of the banks only serves to make the sovereign solvency crisis worse.
European Competition Commissioner Joaquin Almunia has admitted that more European banks may need to be recapitalised. 
As the debt crisis deepens and banks in France and Germany exposed to countries like Italy, he said: "The worsening of the sovereign debt crisis, its impact on a fragile banking system and the continuing tensions in funding markets, all point to the possible need for further recapitalisation of banks on top of the nine that failed the stress tests earlier this year," Mr Almunia said. 
The Commission is now expected to extend rules put in place at the time of the financial crisis of 2008 that will enable Governments to provide state aid to their banks after 2011, if necessary. 
"Of course, banks should first try to finance themselves on the markets, and take all possible measures like the sale of subsidiaries and limitation of dividends, before they turn to the use of public backstops, which should be used as a last resort," he added. 
"I would have preferred to go back to normal rules sooner and this was indeed my intention until the summer."
“But the situation we are facing these days calls for an extension of the existing state aid crisis regime." 

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