Distressed European Union banks that tap national governments or the region’s €440bn rescue fund for capital will be subject to state-aid penalties, involving compulsory restructuring or – in the worst case – orderly wind-downs.
The stance – on the agenda at this weekend’s EU summit – has emerged after intense debate between European officials and bankers over whether the plan for forced recapitalisations should be exempt from normal state-aid rules.
European Banking Authority see a capital gap of about €80bn if banks marked holdings of troubled sovereign bonds down to market prices and then had to lift core tier one capital ratios – a key signal of strength – to 9 per cent.
In draft guidelines, seen by the FT, for the operation of the enhanced European financial stability facility, EU governments say a “planned restructuring/resolution of financial institutions” is “the sine qua non condition” for assistance.
The proviso, consistent with EU state-aid rules applied throughout the crisis, could discourage banks from seeking public aid and spur them to shrink balance sheets instead, raising the danger of a credit crunch, bankers say.
But European officials argue new bail-out tools fall under EU state-aid rules, blocking lenient treatment of banks in the looming round of recapitalisations. They say France in particular has been stressing the special and temporary nature of the planned recapitalisations, particularly if they come via the European Stability Mechanism, the permanent bail-out fund due to be launched in mid-2013 though this could be brought forward.
EU governments have in recent weeks put pressure on their banks to beef up their capital cushions and make the region’s financial system more resilient should Greece be forced to restructure. French banks are particularly exposed.
France is under pressure to recapitalise its banks, but, after appearing to entertain the idea, it recently rejected tapping the EFSF. It says its banks are building up capital themselves, with the government ready to step in if needed.
Banks considered for EFSF-funded capital injections would have to be “systemically relevant or [pose] a threat to financial stability”, with the relevant government and the European Commission drawing up a “restructuring plan”.
“As a rule, every beneficiary will be subject to a restructuring plan commensurate with the extent of financial support received,” the guidelines say, adding that this was meant “to limit, to a maximum, the distortion of competition”.
The cost of a recapitalisation loan, which will pass from the EFSF to banks via national governments, will be “consistent” with the cost of current EFSF loans to Ireland and Portugal. Capital injected would have to be “of the highest possible quality.”
A government can apply for EFSF intervention on the secondary bond market if, for example, debt prices are “unusually volatile”, prices move in a fall, or poor liquidity excessively widens the gap between bid and offer prices.
Precautionary credit lines would be available to governments whose sovereign bonds are threatened by speculative attack. It is described as a “credit line to overcome external temporary shocks to prevent crisis from occurring.”
“It is important that the resources available are sizeable enough to counter doubts that the country has sufficient funds to meet its financing needs and give market confidence,” the text says, suggesting an intervention equal to 2-10 per cent of GDP.
A country qualifying for a loan would get money for one year, though its duration could be extended twice, each time by six months. Less fiscally sound countries would have to agree to “enhanced surveillance” during the period.
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