European Union moves to shore up ailing banks moved into higher gear on Thursday as U.S. President Barack Obama urged European leaders to act faster to tackle a sovereign debt crisis that threatens global economic recovery.
The EU's executive arm said it would present a plan for member states to coordinate a recapitalization of their banks, as regulators met in London to reassess the capital buffers of stressed lenders that received a clean bill of health in July.
The European Central Bank threw a lifeline to commercial banks by turning up its liquidity pumps to provide longer-term cheap money for the growing number of European lenders which have seen wholesale funding dry up as market confidence ebbs.
The moves came amid fears that Greece, the most heavily indebted euro zone state, may default within months, setting off a chain reaction of sovereign downgrades and bank failures.
We are now proposing member states to have a coordinated action to recapitalize banks and so to get rid of toxic assets they may have, European Commission President Jose Manuel Barroso said in a television interview relayed on YouTube.
It was the most explicit statement yet from a top European official on joint action to help restore confidence in a banking sector that is increasingly being shunned by investors as the euro zone debt crisis deepens.
However, a senior EU official told Reuters there would be no common European mechanism to deal with toxic assets, and no joint bad bank for Europe.
In Washington, Obama told a news conference that uncertainty about the euro zone crisis was hitting global markets and posed the biggest headwind to the U.S. economy.
Ratcheting up pressure on European leaders, he said he hoped they would have a concrete plan in time for a November 3-4 Group of 20 summit to overcome the debt crisis by creating enough firepower to help weaker member states.
U.S. Treasury Secretary Timothy Geithner told Congress in prepared testimony: The critical imperative is to ensure that the governments and the financial systems under pressure have access to a more powerful financial backstop.
In the first case of a bank felled by the crisis, Franco-Belgian municipal lender Dexia's board will vote on a break-up plan on Saturday as the French and Belgian governments argue over how to split the cost to the taxpayer.
Barroso would not speculate on how much money would be needed for recapitalization across the 27-nation bloc but his comments helped push European shares up 2.4 percent on the day as investors welcoming signs of action.
The ECB disappointed some investors by leaving interest rates unchanged at 1.5 percent, on a split decision, despite signs of a sharp slowdown in the European economy. But it compensated with a raft of measures to boost liquidity.
ECB President Jean-Claude Trichet announced after chairing his final monetary policy meeting before retiring that the ECB will provide unlimited one-year funding in two operations and revive its policy of buying covered bonds for up to 40 billion euros.
German Chancellor Angela Merkel said Europe should not hesitate to recapitalize its banks if this prevents greater economic damage, and leaders would take very seriously expert advice that the time was ripe for such a step.
Jean-Claude Juncker, chairman of euro zone finance ministers, said banks in need of capital should turn first to the markets, then to national governments and as a last resort to the euro zone's rescue fund.
Some officials fear other lenders could suffer a similar fate to Dexia, even though they passed the European Banking Authority's (EBA) July stress test of 91 banks in the EU.
Those tests concluded that only eight banks failed and that they needed a collective 2.5 billion euros ($3.3 billion) -- a fraction of the up to 200 billion euros the International Monetary Fund believes EU banks require.
The EBA, which set the criteria for the tests carried out by national regulators, held the second day of a board meeting to review banks' capital needs based on the same data which formed the basis of those tests.
If the banks were forced to mark sovereign bonds holdings to current market prices, 18 would fail with a total capital hole of 40 billion euros, according to a Reuters Breakingviews stress test calculator.
EU Competition Commissioner Joaquin Almunia said there was a need to reassess bank assets, especially sovereign debt, to promote recapitalization, but public money should be used only as a last resort and in line with the bloc's state aid rules.
The EBA is preparing the ground by determining which lenders should be included in any coordinated recapitalization that its members would oversee. The European Commission has no power to impose a recapitalization plan on EU states.
Markets and industry officials say the key missing piece is whether enough money can be found fast enough to fund a recapitalization plan and stop contagion from Greece or Dexia.
The euro zone knows what it needs to do and should just get on with it, a UK banking industry official said.
The EBA, made up of regulators and central bankers from EU member states, said it was asked by the European Systemic Risk Board last month to coordinate efforts to strengthen bank capital.
It is under pressure after its chairman, Andrea Enria, admitted on Tuesday that this year's stress test, which Dexia passed with flying colors, failed to reassure investors.
Some banks have come under heavy criticism for not updating investors clearly on the value of their government debt holdings and bumping up capital buffers to cover markdowns.