Europe seeks back-up plan for troubled banks within weeks

Mon Oct 21, 2013 3:41pm EDT
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By John O'Donnell and Huw Jones

BRUSSELS (Reuters) - European states need to spell out by late November how they will cope with recapitalizing troubled banks to pave the way for prompt health checks, EU leaders will pledge this week, according to a draft statement.

Such a commitment is designed to persuade investors that countries are ready to come clean on the banking problems that continue to dog the region after more than half a decade.

On October 24 and 25, leaders from the European Union's 28 member states gather in Brussels. They will take stock of the EU's most ambitious project since the creation of the euro to set up a banking union to help growth and prevent future crises.

Unlike in the United States, where rapid infusions of capital put its banks quickly back on track, Europe's financial system remains frozen, with lenders in countries such as Greece, Spain and Italy hurt by weak demand and soured loans.

To break the "doom loop" between indebted European countries and their banks and reassure investors that stressed euro zone lenders would be dealt with on a regional level, a banking union, with the ECB as supervisor, is seen as crucial.

The ECB will test the health of the largest euro zone banks to make sure none are too weak to operate, but if countries do not have the money to raise their capital if needed, the exercise would hurt, rather than boost investor confidence.

In a draft statement from the leaders, they commit to addressing this issue, by demanding that countries under ECB watch outline, within roughly five weeks, how they plan to help banks in trouble.   Continued...

The headquarters of the European Central Bank (ECB) are pictured in Frankfurt June 6, 2013. REUTERS/Ralph Orlowski