Bloomberg News

ESRB Urges Swift Action on Increased Risks to Financial System

September 21, 2011

Sept. 22 (Bloomberg) -- The European Systemic Risk Board urged swift action from policy makers to tackle threats to the financial system that have increased “considerably” as the region’s sovereign debt crisis pressures banks.

“Key risks stem from potential further adverse feedback effects between sovereign risks, funding vulnerabilities within the European Union banking sector, and a weakening of growth outlooks both at global and EU levels,” the ESRB, Europe’s risk watchdog, said in a statement late yesterday. “Decisive and swift action is required from all authorities.”

Concerns are mounting that European banks may not have sufficient capital to withstand a default by Greece and slowing economic growth caused by governments’ austerity measures. Lloyd’s of London has stopped depositing money with some banks in Europe’s peripheral economies, Luke Savage, finance director of the world’s oldest insurance market, said yesterday.

The ESRB, which is hosted by the European Central Bank in Frankfurt, issued a confidential warning to European governments in June urging them to ready capital injections for banks that failed or came close to failing stress tests, a European financial official said.

The ESRB said yesterday that supervisors should coordinate efforts to strengthen bank capital, “including having recourse to backstop facilities, taking also into account the need for transparent and consistent valuation of sovereign exposures.”

EFSF Role

“If necessary, this could benefit from the possibility for the European Financial Stability Facility to lend to governments in order to recapitalize banks, including in non-program countries,” it said, referring to the euro area’s rescue fund.

The ESRB, which aims to warn of brewing risks in the financial system, was set up in January as part of a new European architecture designed to ward off another financial crisis such as that which followed the collapse of Lehman Brothers Holdings Inc. in 2008. Its board is headed by ECB President Jean-Claude Trichet, with Bank of England Governor Mervyn King as deputy.

“Authorities must act in unison with a total commitment to safeguard financial stability,” the ESRB said in the statement.

--Editors: Matthew Brockett, Craig Stirling

To contact the reporter on this story: Jeffrey Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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