EU ponders rescue fund for non-euro banks ahead of stress test

Facility could be used to help banks outside the euro zone which suffer capital deficits

PUBLISHED : Monday, 30 September, 2013, 12:00am
UPDATED : Thursday, 03 October, 2013, 2:20pm

The European Union is weighing up whether a €50 billion (HK$524 billion) rescue fund can be turned into a backstop for banks in member states outside the single-currency bloc, two EU officials said.

The EU's balance-of-payments fund currently has about €40 billion available, after being used to help Latvia, Hungary and Romania, the officials said. The European Commission now wants to overhaul the fund and add a tool for bank aid that could be tapped by non-euro countries whose lenders fail next year's continent-wide stress tests.

The Brussels-based commission wants a resource that can operate alongside the euro area's €500 billion firewall, so that the entire 28-nation EU is braced for the results of next year's stress tests, the officials said. The goal is to reach a deal by the end of this year so that the tool can be ready by the middle of next year, when the commission also hopes to have finished negotiations on when the firewall can provide direct aid to euro-zone banks.

"The commission has proposed that the balance of payments mechanism include a bank recapitalisation instrument for the same reason that one is available for euro-area countries under the ESM [European stability mechanism]: to provide a credible public backstop at the European level capable of reassuring supervisors and market participants that financial stability will be assured," said commission spokesman Simon O'Connor.

"This is particularly important in view of the forthcoming asset quality review and stress tests, which need to strengthen confidence in the solidity of the financial sector in Europe."

The European Central Bank will be conducting balance-sheet reviews of major banks across the euro area as it prepares to take on new oversight duties in the second half of next year. In addition, all EU banks will face a new round of stress tests, carried out by the ECB, national regulators and the European Banking Authority.

If all the proposed backstops are in place, the EU would have as much as €400 billion available to handle any banking problems that emerge, one of the officials said. This would include €60 billion in possible direct bank aid from the European stability mechanism and another €280 billion in capacity for banking assistance programmes like the one Spain received last year, as well as the proposed tool for non-euro member states.