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EU finance ministers focus on shoring up bank reserves

05-04-2012 16:27 BJT

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European Union finance ministers met in Brussels on Wednesday in the wake of the downgrade by Standard and Poor’s of eleven Spanish banks at the start of the week.

European finance ministers arrive in Brussels to decide how much money banks should be forced to keep in reserve to avoid needing bailouts when too much debt turns toxic.

EU Commissioner for Economic and Monetary Affairs Olli Rehn (L) talks with Spanish Economy
Minister Luis de Guindos Jurados prior to a meeting meeting, May 2, at EU headquarters. EU
finance ministers inched closer Thursday to an agreement to beef up capital rules for banks
against future crises after a heated debate between British-led nations and a Franco-German
bloc (AFP Photo/John Thys)

Anders Borg, Swedish Finance Minister, said, "Either we have strong banks or the tax payers take the risks and I would prefer to have strong capital in the banks than to take risks with the taxpayers."

It’s not just Spanish financial institutions that remain shaky. Right across the EU banks are in trouble, even in large economies like Britain and France.

How much capital banks should keep in reserve has become a key question in the financial crisis, which has seen many of Europe’s largest banks bailout out by governments. But the EU’s 27 member states remain divided over just how much money financial institutions should set aside to protect themselves against risky debt.

Policy experts warn reserves will need to be well above the so-called Basel 3 levels being discussed at the meeting if the banks are to be protected against bad private debt as well as enormous holdings in troubled government bonds.

Danies Gros, director of Center for European Policy Studies, said, "Whether they have under the Basel rules five percent or perhaps eight percent it doesn’t help. Because we have seen in the case of Greece that if things go wrong with a sovereign as we saw in the case of Greece then things go really wrong and higher capital requirements are neither here nor there."

There is also wrangling over whether governments should be allowed to force their banks to set even higher reserve limits than the ones that will be agreed at an EU level.

Britain and Sweden think this should be the case, but countries like France believe countries should be forced to keep the reserve limit at the level set by Brussels.

France argues a higher reserve would make British and Swedish banks appear more secure and could lead to a flight of capital to these two already strong financial centers. And governments also need to agree on a way to get banks to boost their reserves without halting lending.

That could exacerbate an existing credit crunch, further slowing the economy of a trading block with 8 of its member states officially in recession. Finance ministers have until June to finalize the new reserve rules.

 

Editor:Zhang Dan |Source: CNTV.CN

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