he European Banking Authority will discuss Franco-Belgian bank Dexia's funding problems on Wednesday in a bid to stop them spreading to other lenders, the watchdog's chairman Andrea Enria said on Tuesday.
The EBA board of supervisors' meeting will hold confidential discussions on Dexia and the initiatives the French and Belgian authorities have taken to support it, Enria told the European Parliament's economic affairs committee.
Enria said the problem was one of fixing the funding issue related to the euro zone's sovereign debt crisis. "It's a major issue that could go from Dexia to other banks, so it's important this is fixed, and the sooner it's done the better," Enria said.
France and Belgium promised on Tuesday to support Dexia via guarantees for a "bad bank" holding its worst assets. Enria said another important lesson for regulators was how significant losses on sovereign debt held by Dexia were "filtered" so they don't impact regulatory capital buffers at the bank, Enria said.
Dexia, like many banks, holds much of its sovereign debt in the "available for sale" accounting category, so it does not have to increase its regulatory capital buffers to take account of unrealised losses on the debt.
"We need to fix that as well," Enria said. Lawmakers asked him why Dexia passed the July stress test of EU lenders and is now under pressure from markets.
He said under current regulatory standards Dexia is "quite well capitalised", but its business model meant its liquidity had become stressed and it needed to be rebalanced from an over-reliance on short-term liquidity, Enria said.
DANGEROUS INTERCONNECTION: This year's stress tests, while improving transparency at banks, have again come in for criticism.
"We have to acknowledge we did not manage to reassure markets on the solidity of European banks, especially due to the treatment of sovereign exposures," Enria said.
Stronger capitalisation of banks is also essential for maintaining the flow of credit to the real economy, and this will also be discussed on Wednesday, he added. "We are now in this dangerous interconnection between the sovereign and the banks," he added.
He said that so far he had seen no sign of a cut in lending to small and medium-sized firms, but he was starting to see weaker flows into trade finance, leasing and cross-border lending, and feared that this would eventually end up hitting smaller firms.
"It's essential we find co-ordinated policy at the European level to strengthen capitalisation of banks and reactivate lending," he added. (Reporting by Huw Jones;