EU official: More banks may need recapitalization

September 20, 2011 - 8:15 AM
Belgium Europe Financial Crisis

European Union Commissioner for Competition Joaquin Almunia speaks during a media conference at EU headquarters in Brussels on Tuesday, Sept. 20, 2011. The European Union's competition commissioner warned Tuesday that more than the nine banks that failed the stress test may need to be recapitalized because of the debt crisis. (AP Photo/Virginia Mayo)

BRUSSELS (AP) — The European Union's competition commissioner warned Tuesday that more than the nine banks that failed the stress tests this summer may need to be recapitalized because of the debt crisis.

In light of the worsening crisis, the EU should extend softer rules on state aid to banks beyond the end of 2011, when they are set to expire, Joaquin Almunia said. He added that he would ask the European Union's executive to approve this plan later this year.

Almunia's comments are the first admission from a high-ranking EU official that this summer's stress tests may not have identified all the region's weak banks that are in need of shoring up their capital buffers.

The comments come as market worries grow about the impact of a default by Greece or other struggling countries on banks and after financial stocks dropped sharply in recent weeks.

International Monetary Fund head Christine Lagarde recently called for forced recapitalizations of banks that are unable to raise capital in the market — sparking harsh reactions from several European policymakers who claimed the stress tests had shown which banks needed to do more.

Nine banks failed July's stress tests and 16 others only barely passed. Those banks have to submit plans on how the want to raise their capital buffers to the EU's banking regulator by mid-October. They then have several months to try to raise the money on the market or seek aid from their governments.

The EU loosened some of its rules on financial aid from governments to banks during the 2008 financial crisis, making it easier to temporarily clear emergency rescues.

"I would have preferred to go back to normal rules sooner and this was indeed my intention until the summer," Almunia said. "But the situation we are facing these days calls for an extension of the existing state aid crisis regime."