European bankers and politicians as well, have rejected a call by the International Monetary Fund (IMF) that the banks need 200 billion euros ($290 billion U.S. dollars) in new capital to ease the sovereign debt losses in the euro zone. The IMF estimate is much higher than the bank’s estimates of capital needs following a stress test in July.
IMF chief Christine Lagarde released a statement on Saturday calling for mandatory capitalization of European banks to prevent a world wide recession. This has raised questions as to whether the European banks have raised enough capital to withstand a downturn in the European economies as well as worldwide.
The European Commission said it sees no need for drastic action since the release of the stress-test results. “Our analysis of the situation hasn’t changed, it is in fact shared by the member states. We did have an in-depth discussion when the results of the stress tests for banks were presented and this our diagnosis and there is no reason to change it now,” Commission spokesman Amadeu Altafaj told a regular briefing.
Governments in the euro zone and The European Central Bank disagree with the IMF. They believe the IMF estimates were met using questionable methodology. Officials from German banks insist there is no immediate need to inject capital into German banks. France has also taken a similar stance according to French Budget Minister, Valerie Pecresse. “French banks are now better capitalized than a year ago; they passed stress tests which were extremely tough less than a month ago. I don’t think there is any cause for worry over French banks,” she said at an event on Thursday.
European bank shares traded slightly lower on the STOXX 600 European Banking Index while bank to bank lending rates edged slightly higher. There are still concerns among investors about the European banks and the economies within the euro zone. The ultimate question is how will Europe deal with the sovereign debt crisis it now faces.