Brussels, 05/10/2011 (Agence Europe) - Like with the collapse of the Irish banking industry in 2010, the problems facing Franco-Belgian bank Dexia have raised new questions about the credibility of the 2011 bank stress tests coordinated by the European Banking Authority (EBA) in the first half of the year, tests that Dexia passed with flying colours. The European Commission says that the fact that Dexia sailed through the tests did not reflect badly on the tests themselves because the macroeconomic background has changed since the tests were published back in July due to the deteriorating sovereign debt markets.
On Wednesday 5 October, a European Commission spokesperson said the stress tests had taken place amidst absolute openness, including over banks' exposure to sovereign debt, but the fact is that the situation has worsened since then. The day before, after the ECOFIN Council, EU Internal Market Commissioner Michel Barnier said the same thing, commenting that the situation had got worse since the tests and there is now more of a liquidity problem than solvency as such. Good capital levels are essential, he added, although this was not the only solution. The eight banks that failed the stress tests and the 16 that scraped through have all invested highly in sovereign debt and are due to submit their recapitalisation plans over the next ten days to their national banking supervisors. The failed banks have until the end of December to acquire greater capital and the second group until the spring of 2012.
Barnier pointed out that the draft CRD IV directive (incorporating the Basel III agreement drawn up by the Basel Committee on higher quality and higher quantity capital requirements for banks) will force 8,300 European banks to raise €460 billion by 2019 (see EUROPE 10423). The directive introduces two liquidity requirements, one of which will force banks to hold enough high quality liquid assets in 2015 to deal with crises arising from risk exposure for one month.
On Tuesday, after the ECOFIN Council meetings, Polish Finance Minister Jacek Rostowski said that the EU27 finance ministers had discussed various financial backstops in the member states and were pleased with the situation. At the Wroc³aw ECOFIN Council meeting, the ministers looked at improvements to the stress tests because the tests had done nothing to reassure the markets despite being more demanding than in 2010 (see EUROPE 10455).
For Dexia, the Commission expects the French and Belgian governments to inform it of any substantial changes to the restructuring of the bank endorsed by the Commission in March 2010 (see EUROPE 10088). A Commission spokesperson said it was crucial that the French and Belgians dealt with the issue in a coordinated manner, adding that the EBA was in close contact with both governments.
At the European Parliament, the head of the EBA, Andrea Enria, said banks were dangerously connected to the debt crisis and this was a major issue that could spread from Dexia to other banks and therefore had to be settled as soon as possible, explains Reuters. The EBA held confidential talks about Dexia on Wednesday. Dexia, like many other banks, gives its exposure to sovereign debt an accounting category which does not oblige it to accumulate more capital if its portfolio deteriorates and Enria said that would have to be dealt with.
Time for a European bank capitalisation plan? After falling sharply for most of the morning, banks picked up again on the stock markets in the afternoon following statements that Europe was preparing a bank recapitalisation plan. Olli Rehn told the Financial Times that a common vision is developing over the need to take a concerted, coordinated, approach in Europe amidst a range of approaches in the member states. He said ministers had a feeling of urgency. In Luxembourg, German finance minister Wolfgang Schäuble said Germany might reactivate its crisis management system to recapitalise its banks, but on Tuesday, the Commission clarified Rehn's comments by pointing out that he had talked of the need to coordinate national measures at EU level.
Meanwhile, the European Central Bank (ECB) is continuing to supply finance to the banking system, supply unlimited quantities of cheap cash to banks finding it difficult to raise finance on the interbank markets. ECB President Jean-Claude Trichet said at a recent hearing at the EP that this special measure was by far the most important one taken by the ECB to deal with the crisis. At their monthly meeting in Frankfurt on Thursday, the Governing Council of the European Central Bank may decide to extend the maturity of the unlimited loans being provided to banks from three to 12 months. (MB/transl.fl)