09/20/2011 07:43 EDT | Updated 11/20/2011 05:12 EST

EU to extend looser state aid rules for banks, calls for more to raise cash amid debt worries

BRUSSELS - The European Union and the International Monetary Fund on Tuesday raised concerns over the health of European banks as the continent's debt crisis worsens.

The EU's competition commissioner warned that more than the nine banks that failed the stress tests this summer may need to be recapitalized and proposed extending crisis rules that make it easier for governments to rescue failing lenders.

Meanwhile, the IMF said in its half-yearly World Economic Outlook that banks needed to boost their capital buffers more quickly and beyond new minimum levels set to come into force in 2019.

Their concerns come as market worries grow about the impact on banks of a potential default by Greece or other struggling countries — financial stocks have dropped sharply in recent weeks.

IMF Managing Director Christine Lagarde recently called for the forced recapitalization of banks that are unable to raise capital in the market. Her suggestion sparked harsh reactions from several European policymakers who claimed the stress tests had shown which banks needed to do more.

But Tuesday's comments from Joaquin Almunia — who runs the department in the EU's executive Commission that has to clear bank bailouts — are the first admission from a high-ranking EU official that this summer's stress tests may not have identified all the banks that are in need of shoring up their capital buffers.

Almunia said that because of the worsening crisis, the EU should extend looser rules on state aid for banks beyond the end of 2011, when they are set to expire, adding that he would ask the other members of the European Commission to approve this plan later this year.

Nine banks failed July's stress tests and 16 others barely passed. Those banks have to submit plans on how they want to raise their capital cushions to the EU's banking regulator by mid-October. They then have several months to try to raise the money on the market or seek aid from their governments.

EU officials have insisted that that process is moving along as planned, even though politicians in some countries with banks that failed or almost failed at the time declared that they saw no need to take further measures.

Almunia, while defending the stress tests, said the financial market turbulence since the tests were published means that some banks may find themselves in a worse situation now.

Because of that, crisis rules on state aid for banks should be extended until market conditions have stabilized, the commissioner added. The EU loosened some of its rules on government aid to banks during the 2008 financial crisis, making it easier to temporarily clear emergency rescues.

"I would have preferred to go back to normal rules sooner and this was indeed my intention until the summer," Almunia said. "But the situation we are facing these days calls for an extension of the existing state aid crisis regime."

The level of concern among international institutions about Europe's financial sector was also underlined by the IMF's call to boost bank capital buffers beyond recently agreed international minimum levels.

"The objective should be to lift bank equity beyond the Basel III minimum and well ahead of the Basel III timetable," the fund said in its World Economic Outlook, referring to the new international banking rules.

That demand clashes with the position of the EU, which made proposals on how to implement the Basel III rules this summer. Under those rules, member states would not be allowed to require their national banks to have higher capital cushions than the those set out in the pan-European legislation.

The new legislation requires banks to boost their purest form of capital, known as common equity Tier 1, from 2 per cent currently to 4.5 per cent by 2015 and lift it by a further 2.5 per cent in the years after.

Raising capital requirements beyond that could have serious implications for European lenders. When it proposed the new rules, the EU said that banks would need to raise some €460 billion in capital by 2019 to meet the minimum levels.

A spokeswoman for the Commission did not respond to a request for comment on the IMF's demand on bank capital.