IIF: European Banks Recapitalizaion Plans Has Serious Problems; Prohibitive Cost

The Institute of International Finance said today that the European Union’s plan for recapitalizing banks has “serious problems” that will hurt economic growth and "and make it harder for some nations to borrow".

IIF Managing Director Charles Dallara wrote today in a letter to the Group of 20: "There is a “clear need” to restore confidence in Europe’s banks" but "extra capital requirementswill come with considerable cost” because of "a flawed scope and approach".
"Banks are likely to decide that the costs of raising capital are 'prohibitive'. Instead of forced injections, banks will likely sell risky assets and cut back on lending, making it harder for countries on Europe’s periphery to access capital markets.

“The market value of the debt of the countries most under scrutiny is likely to decline further as banks unload sovereign bonds,” “This is contrary to the goal of stabilizing and underpinning the outlook for sovereign debt in Europe.”

 “overall credit exposure to the euro-area private sector would need to decline by at least 5 percent,”  “It is essential that the higher European capital requirements are a temporary measure as intended, not sustained over time and not seen as a new standard to be imposed more widely.”