Debt-laden euro banks need urgent stress tests: Britain

2nd June 2010, Comments 0 comments

Eurozone banks must undergo urgent stress tests, a British Treasury minister demanded on Wednesday amid fears that commercial debt exposure runs to crippling levels.

"A genuine, rigorous stress testing exercise is urgently needed to answer questions around solvency in severe market conditions," Financial Secretary to the Treasury Mark Hoban told an audience in Brussels.

He was speaking two days after the European Central Bank in an annual report suggested that eurozone banks might have to reduce the value of their assets by a total of 195 billion euros (240 billion dollars) by 2011.

"The tests should be transparent both with respect to their results, but also the methods used," Hoban insisted, calling for "urgent action" to be taken on those who fail.

"Only this way can we restore true stability and confidence to this sector in the near-term," he added, largely blaming ECB and governmental interventions on debt markets in recent weeks on "severe strains" in the banking system.

According to the ECB, banks would need to refinance long-term debt of around 800 billion euros (980 billion dollars) by the end of 2012, the central bank noted.

"The continued reliance of some smaller or medium-sized euro area banks on central bank refinancing continues to be a cause for concern," the report also said.

Hoban was maintaining the tone of the new Conservative-Liberal Democrat coalition government in London, whose ministers have used their first visits to Brussels since taking office to adopt a tough stance on European matters.

His boss, Conservative finance minister George Osborne, used his first meeting with peers last month to demand that the European Union freeze its 2011 budget instead of levvying an inflation-busting increase on member states forced to cut their own spending.

Liberal Business Secretary Vince Cable followed up by warning that Brussels plans for a network of inter-connected national bank "resolution" funds, a levy that would be used to carry banks through to closure if they could not be saved, posed dangers to British savers.

Hoban said London "is concerned about the moral hazard implications of designated funds.

"Some argue that these concerns can be mitigated if a fund is not permitted to participate in bailouts.

"We are sceptical. It is hard to see how any tax legislation, European or otherwise, could be crafted which had a credible and legally watertight 'no bailout clause' for banks."

Hoban echoed those concerns, warning that his London government "will never shirk the difficult choices needed to reform banking and financial regulation", adding that it could "go further" on its own.

He spelled out that he was referring there to higher capital standards for banks, giving regulators the "discretion to go further" than that laid down in EU rules, for instance.

© 2010 AFP

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