Banks in Europe should temporarily raise their capital buffers to better withstand the effects of debt market turmoil, the president of the European Commission said today as he presented a broad new crisis plan that was thin on details.
Jose-Manuel Barroso said that until systemically important banks have raised their capital buffers to new standards, they should not be allowed to pay out dividends or bonuses.
The fear gripping the financial sector now is that banks could take big losses on bonds they own from governments with shaky finances, like Greece. That uncertainty is stifling lending - between banks and to the wider economy - which threatens to throw the euro zone into recession.
To assess banks' capital needs, their exposure to all sovereign debt should be taken into account "in a transparent way," Barroso said. He said that if banks can not raise the capital on the market, they should get help from governments, who in turn can ask for money from the euro zone bail-out fund.
Barroso also called for a permanent bailout fund, the European Stability Mechanism, to come into force already in mid-2012, one year ahead of schedule.
The ESM, in contrast to the current bail-out fund, requires private investors to take losses on government bonds if a state needs to write off some of its debt load.
In his proposals, Barroso aimed to hit at all fronts in Europe's debt troubles, but remained thin on details.
On Greece, he said the next tranche of aid money should be paid out and that the country should get a second bail-out "based on adequate financing through public sector and private sector involvement."
He also lobbied for bigger powers for the EU's monetary affairs commissioner, which would give him more influence over national budgets.
