Thursday

30th Jun 2022

EU agrees to fresh bank bail-outs

  • Tusk said there had been 'heated debate' on the issue of bank recapitalisation (Photo: consilium.europa.eu)

The European Union’s 27 member states have finally agreed on one of the key elements to a comprehensive solution to the eurozone’s debt crisis, a recapitalisation of the region’s banks.

Donald Tusk, the Polish prime minister and current chair of the six-month EU rotating presidency, said following a summit of all the states in the Union that “after some heated debate,” the EU’s premiers and presidents have adopted a plan that amounts to a fresh bail-out of the banks.

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Under the agreement, ‘systemic’ financial institutions that participated in July’s stress tests co-ordinated by the European Banking Authority will be required by June of next year to maintain a ratio of Tier One capital - the ‘high-quality’ money it holds to protect against risk - of nine percent as compared against its risk-weighted assets, in essence a bank’s total holdings.

Banks must first attempt to raise the cash from the markets, but they must not do so by pulling funds from their subsidiaries, a requirement insisted upon by eastern European states many of whose banks are owned by major financial institutions situated in the heart of Europe.

During the 2007-2008 financial crisis, eastern European banks were destabilised when their western parent banks withdrew investment from the region to protect core operations.

This time around, central banks in the east will monitor capital flows from core banks and if they are not maintained at current levels, they will now be able to intervene to halt such losses.

Romanian President Traian Basescu declared himself “very happy” that the bloc had protected the east from potentially damaging vast outflows of funds from the region as western banks are forced to retrench themselves.

It is understood that while most of Latvia’s parent banks are well-capitalised Swedish institutions with little exposure to Greece, Riga is also very pleased at the outcome.

The Polish finance minister Jacek Rostowski went on to insist that the capital requirements imposed on banks “will be made once. It is a one-off exercise. This obligation will not be repeated in the future.”

Tusk said that there had been “an emotional element in the debate” amongst EU leaders, while Rostowski insisted: “This is not in any way a gift to bank owners. In exchange for this, member states will take a stake in the banks.”

Tusk however would not give a precise sum to the recapitalisation as much still depends on the outcome of other elements of a “grand bargain” solving the eurozone’s troubles.

The exact quantity will depend on how big a haircut the banks are willing to accept on their holdings of Greek debt Rostowski told reporters. A larger write-down will require a larger bail-out.

He said the full sum will be announced “in due course” by the European Banking Authority - the region’s sectoral regulator - “and not here at the summit.”

However, it is understood that the final sum on the table amounts to around €110 billion.

Separately, French President Nicolas Sarkozy speaking to reporters said that the accord that had been reached by the EU 27 on Wednesday "depends on the result of the negotiations of Greek restructuring, which has not been finalised."

Tusk also poured cold water on expectations that any grand bargain would emerge from the Wednesday eurozone summit.

“Whether all decisions will be taken to day, I would be very cautious about making such a statement,” he said. “We are very close to a full political agreement, but some details may need more time.”

“It is important however that the euro area demonstrate that a political agreement has been achieved and that the only things left are important but technical details.”

Banks, Europe haggle over scale of bond haircut

The world’s banks have delivered a “significant” new offer on the scale of a haircut on their holdings of Greek sovereign debt, but no details have appeared since their earlier stance described by one EU diplomat as “playing hardball”.

Bank drain threat hangs over eastern Europe

With large parts of their banking sector in French, Austrian or Greek hands, eastern European countries are wary that upcoming rules on bank recapitalisation will allow regional subsidiaries to be drained of money, putting their economies at risk.

Commission to unveil bank bail-out plan

European Commission President Jose Manuel Barroso has said that the EU executive will put forward plans for a fresh round of bank bail-outs across Europe on Wednesday.

Merkel, Sarkozy will do ‘whatever necessary’ to bail-out banks

Financial markets hoping for the outline of some grand strategy for dealing with the ever-worsening eurozone crisis are likely to be disappointed by the vague announcement offered up by the French president and German chancellor after emergency talks in Berlin on Sunday.

Banks stonewall EU leaders on haircut

Negotiations between EU leaders and representatives of the global banking industry over the scale of losses the financial institutions are willing to take on Greek debt have all but broken down.

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