EU officials defend health of European banks

"There is no liquidity or collateral shortage for the European banking system," Trichet said during a special hearing on the eurozone crisis organised by the European Parliament.

He went on to spell out that euro banks had €14,000 billion in collateral to cover short-term cash injections from the eurozone central bank – and that the ECB has promised open-ended lending to any European bank that needs cash.

For his part, Rehn pointed to the stress tests for 90 banks published in July as reason for confidence in the sector.

"EU banks are significantly better capitalised now than they were one year ago," he said.

"This has been confirmed by the stress tests in July. In the run-up of the tests, European banks increased their capital by some €50 billion."

The broadside by Lagarde – made during an international gathering of finance experts in the US over the weekend – took EU officials by surprise.

Lagarde said the old continent's banks are in "urgent" need of an injection of public-sector capital.

Talk about the health of European banks has slid down the agenda as the eurozone government debt crisis took centre stage in recent weeks.

But while EU officials have rebuffed Lagarde's criticism, the European Banking Authority, a supervisory set-up, appears to agree with her assessment.

According to a report Tuesday in the Financial Times Deutschland, EBA chief Andrea Enria in a letter to EU finance ministers is demanding that the eurozone bailout fund be allowed to give aid directly to troubled banks. Enria believes this would calm the financial markets concerned about banks' exposure to troubled eurozone countries.

At the moment the European Financial Stability Facility may give money only to governments. These can then pass it on to financial institutions.