Europe gave a cool reception to a demand from the International Monetary Fund's new head Christine Lagarde to force its banks to bulk up their capital, saying the continent had done enough already. The European Commission said there was no need to re-capitalise the banks over and above what had been agreed after a recent annual "stress test" check of their ability to withstand economic and financial market headwinds.
"I don't think so. This discussion has already taken place between the EU and the IMF, and the IMF is well aware of the results and the follow-up decided after the stress-tests," Commission spokesman Amadeu Altafaj said. Lagarde, speaking at an annual meeting of central bankers in Jackson Hole, Wyoming, on Saturday urged politicians to "act now" or risk seeing the fragile recovery derailed.
"Banks need urgent re-capitalisation," Lagarde said. "The most efficient solution would be mandatory substantial re-capitalisation - seeking private resources first, but using public funds if necessary." The former French finance minister did not elaborate. The European Union has already urged national governments to provide capital to banks identified as weak by the stress tests if they are unable to raise capital on their own.
Last month a summit of eurozone leaders agreed to let the bloc's 440 billion euro ($632 billion) bailout fund finance the re-capitalisation of banks if necessary, even in countries which are not receiving international bailouts. Earlier this month, large French and Italian banks suffered steep share price declines on speculation about their financial strength, prompting France, Italy, Spain and Belgium to impose short-selling bans on financial stocks.
Pressure on European banks to raise more capital had increased in July after European stress tests found eight banks failed to meet capital requirements, revealing a total capital shortfall of 2.5 billion euros ($3.5 billion). However, Lagarde's comments came as stocks in Europe bounced back, tracking a late rally on Wall Street on Friday, after signs that the US Federal Reserve would continue to support the US economy. European bank stocks were up 1.2 percent on Monday.
Greek bank stocks gained most, with some rallying 20 percent, as they were also boosted by a pending merger of local banks Eurobank and Alpha Bank, raising hopes that Greek banks will be able to sort out their problems without government help. "(Lagarde's) comments won't help to boost confidence in the international financial system," said Gerhard Hofmann, board member of the association of German co-operative banks. "If any European bank needs fresh capital, it would be better to stabilise the institute properly than to discuss it publicly in such a tense market situation," he said. A source at Spain's economy ministry echoed those comments. "The government has already put in place from the start of this year a re-capitalisation plan for its financial institutions, with very high requirements," the source said.
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