G8 turns spotlight on European banks

THORNY ISSUE: While Britain has warned its neighbors that their failure to clean up banks could hold up recovery in the UK, most G8 ministers don’t seem too cooperative


Mon, Jun 15, 2009 - Page 10

Pressure mounted on Europe to reveal the viability of its crisis-hit banks after a meeting of G8 finance ministers in southern Italy over the weekend ended in disarray over the thorny issue.

Britain and the US have already carried out “stress tests” to gauge the capital requirements of their banks — a painful exercise seen as boosting confidence in a sector at the epicenter of the global economic crisis.

But Berlin has resisted calls for tests on its banks saying they could undermine fragile economic confidence. London, meanwhile, warned its European partners that their failure to clean up banks could hold back Britain’s recovery.

The contentious issue was not even mentioned in a statement at the end of the G8 meeting despite it dominating on the sidelines of the talks.

“The uncomfortable truth for Europe is that, however flawed it might have been, the US stress test exercise has so far proved effective in bolstering confidence and helping banks to raise capital,” said Marco Annunziata, chief economist at Italian banking giant Unicredit.

“Eurozone policymakers appeared somewhat divided against criticism that Europe has not yet undertaken a coordinated and transparent stress testing of its major financial institutions,” he added.

Annunziata said the tests, which last month showed that 10 big US banks need US$74.6 billion in extra capital, were “the most important recent effort to restore confidence in the financial system.”

Asked about the tests, G8 meeting host and Italian Finance Minister Giulio Tremonti said they should be coordinated at the European level and added: “In Europe we haven’t begun speaking about stress tests.”

“Each one of us is following its own schedule,” French Finance Minister Christine Lagarde said. “We’re not looking at the example of this or that country.”

“We’re not hiding anything under the carpet,” she added.

Canadian Minister of Finance James Flaherty took a more conciliatory tone after the meeting, saying he was “much less frustrated now” after he said Europe had agreed to report on the results of bank stress tests on a systematic basis.

“The difference of opinion now is whether one reports with ­respect to the results of specific institutions and name the institutions or whether one reports about one’s system,” Flaherty told reporters.

Speaking earlier this month, however, German Finance Minister Peer Steinbrueck voiced skepticism on the tests.

“We are for a stress test of the whole system not with a view of the specific capital situation of banks,” Steinbrueck said, adding that publication of the results as Washington has done could prove “counterproductive” by jolting investors.

“There is a clear difference between the banks in Europe and in the United States,” he said.

EU finance ministers have agreed to subject their biggest banks to tests in the coming months to check for nasty surprises lurking on their balance sheets. The aim is not to identify which banks need more capital and how much, but rather to spot the risks that may threaten the broader financial sector.

The IMF has urged Europe to carry out these tests as part of a “resolute and coordinated clean up of the banking system” which it said was “essential” for restoring confidence in the financial sector.

“Europe can hardly afford a piecemeal approach which perpetuates uncertainty, leaves private investors sidelined, and allows government involvement in the sector to weigh on overall efficiency,” the IMF said.