European leaders announced Wednesday they had agreed on plans to shore up the region’s banking system, seeking to contain a spreading debt crisis and prevent a new recession.
The 27-member European Union said banks would be asked to raise perhaps $150 billion in new capital as a buffer against possible losses on their holdings of European government bonds that have declined in value. The agreement represented the most tangible progress made by European leaders after days of crisis negotiations.
The smaller group of 17 European nations that share the euro, meanwhile, continued talks in Brussels over a series of related problems. These include how to put Greece’s troubled government finances back on a stable footing and how to best use the limited resources of the bailout fund set up by the euro-zone countries.
Efforts to increase the clout of the bailout fund got a boost earlier in the day when German Chancellor Angela Merkel won a strong endorsement from lawmakers in Germany for her plan to reinforce the fund.
Because the plan to shore up the banks applies to European economies both inside and outside the euro area, the initiative was the subject of deliberations by the full European Union.
Along with increasing bank capital, the plan calls for a new effort by governments to ensure that banks have the funds they need to operate. European banks rely heavily on short-term loans to conduct their business and the vulnerability of that funding played a role in the recent collapse of the French-Belgian Dexia bank.
Concerns about the European economy have caused many investors, including U.S.-based money market funds, to pull out of European banks. This development has raised bank operating costs and generated fear that Dexia would be just the first in a series of casualties.
The new plan asks the European Central Bank, the European Investment Bank and other agencies to “urgently explore” a guarantee system so that banks could wean themselves from short-term loans, which often must be renewed weekly or even daily.
Under the plan, banks would have to set aside capital equal to 9 percent of their assets. That represents a significant increase from the 5 percent level used as a standard by the European Banking Authority , when it recently analyzed whether the region’s financial firms could weather a new economic downturn.
One concern about increasing relative capital levels is that banks could reach the 9 percent threshold by decreasing their total assets, in other words reducing how much money they loan to businesses, consumers and governments. This pullback could stymie economic growth at a time when it is already slowing in much of Europe.
To head off this prospect, the bank capital plan calls for heightened oversight by regulators to ensure that banks don’t achieve the new targets by selling off assets or restricting new loans. Regulators “must ensure that banks’ plans to strengthen capital do not lead to excessive deleveraging, including maintaining the credit flow to the real economy,” the EU statement read.
Banks will have until June 30 to meet the new requirement. Some analysts criticized that time frame, saying a quick and broad infusion of money was needed across the European financial system. Banks that cannot raise the money on their own may seek government loans or support.
In winning the endorsement of German lawmakers for her bailout proposal earlier Wednesday, Merkel warned that Europe could be headed for financial disaster if its common currency fails.
“The world is watching Germany and Europe to see if we are ready and able to take responsibility,” Merkel told a packed parliament before the vote. “If the euro fails, Europe fails.”
Speaking ahead of the emergency E.U. summit meeting in Brussels, Merkel said it should not be taken for granted that “there will be peace and affluence in Europe in the next half century.” Saying that Europe is facing its toughest period since the end of World War II, she called on the Bundestag, the lower house of the German parliament, to meet its “historic duty” and back her plan.
After she spoke, lawmakers voted 503 to 89, with four abstentions, in favor of her outline for increasing the power of the European bailout fund.
But a continuing deadlock in E.U. talks with banks regarding a second bailout for Greece dimmed prospects for a breakthrough at the summit later Wednesday on forging a comprehensive strategy to resolve the European debt crisis.
In her speech to parliament, Merkel said deep changes must be made to Europe’s economy if the euro is to hold together as currency. But she offered few concrete details about the steps she would take to protect it.
The lingering uncertainty underlined the likelihood that the Brussels summit would fall short of achieving the comprehensive plan that Merkel and French President Nicolas Sarkozy had promised earlier this month.
“We need to act together jointly,” Merkel said Wednesday. “It’s not possible to have a simple solution. We will have to deal with this situation for years. . . . We have a historical obligation to fulfill.”
Underscoring how many issues remain unresolved, Merkel said she would not commit any more German money to supporting Europe. She called for private investors to make a “large contribution” to ease Greece’s debts.
Birnbaum reported from Berlin. Staff writer William Branigin in Washington contributed to this report.
