May 13, 2011 / 12:28 PM / 8 years ago

Weak banks to get six months to raise funds - EU paper

BRUSSELS (Reuters) - Banks judged in stress tests as too weak will have up to six months to bolster their capital but will only get government money as a last resort, according to an EU policy document seen by Reuters on Friday.

European flags are seen outside the European Commission headquarters in Brussels June 30, 2010. REUTERS/Thierry Roge

The paper, which outlines the position European Union ministers will take when they meet on Tuesday, shows the continued reluctance of EU countries to help struggling lenders and will disappoint those who hoped for speedier action.

“Should the stress test reveal a capital need, private-sector solutions will be preferred,” officials write in the document. “The use of public funds will be available only as a last resort.”

The document also says banks judged too weak in the current round of stress tests will have up to six months to address their problems and may get longer if market conditions are hostile.

“Any institution concerned will be allowed ... three months ... to present clear plans to address vulnerabilities and a maximum of six months ... to implement the necessary remedies,” says the report, adding more flexibility is possible.

Europe’s banking watchdog is finalising a second round of stress tests on the region’s lenders, designed to rebuild confidence in the bloc’s financial system by laying bare banks’ lending exposure to struggling countries such as Greece.

But the process, due to draw to a close in coming weeks, has been drawn out as countries including Germany debated how to prop up flagging lenders, with the government reluctant to do so.

“Given that we are a month away from the stress test results, this gives us the feeling they are not prepared,” said Graham Bishop, an economist who advises banks.

“I would have expected that the moment the test results are released they would have statements on how to deal with it on the spot, not three months later.”

Daniel Gros of Brussels think-tank the Centre for European Policy Studies said it was further evidence of reluctance to act.

“The political desire is to wait, to delay and not to recapitalise any banks if it can be avoided,” he said. “In reality, they won’t get six months. If the markets detect weakness, they will mark banks down.”

Editing by David Holmes

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