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Christine Lagarde calls for European banks to find more capital

Fears of a sequel to the 2008 credit crunch are growing because of banks’ exposure to weak economies in the eurozone

The British Bankers’ Association (BBA) has thrown its weight behind a call from Christine Lagarde, head of the International Monetary Fund, for European banks to be forced to recapitalise to help prevent another financial crisis.

Fears of a sequel to the 2008 credit crunch are growing because of banks’ exposure to weak economies in the eurozone, where countries such as Italy, Spain and Greece are struggling to maintain international investor confidence.

Angela Knight, chief executive of the BBA, said that she agreed with Lagarde, who suggested at the weekend that European banks should be forced to accept capital injections.

Knight said: “I think she is right: some European banks should hold more capital as action is urgently required to stabilise the situation inside the eurozone.” But she thought that British banks would not have to recapitalise “because they already did so in 2009-10″ and that further strains on the banking system were “more apparent on the continent than here”.

But Knight admitted that if Europe lurched into a significant slowdown and the US also faltered, “even British banks will be minded to hoard cash” rather than lend it to companies and individuals. “One could envisage a situation where there would be less readily available credit from the UK banks.”

Knight added that British banks could also withdraw capital if the upcoming Independent Commission on Banking orders a split of banks’ deposit-taking arms from their investment banking operations.

Lagarde’s comments about European banks were made at a central bankers’ meeting at Jackson Hole in the US, against a backdrop of concern that some eurozone institutions are being shut out of international money markets.

There is no evidence, however, that UK banks are finding it hard to borrow and Knight said American lenders tended to trust UK banks, “but were far more wary of European institutions”.

In one of her strongest warnings yet about the risk of a new global slowdown, Lagarde also said US policymakers should do more to ensure that house prices were not hit by another downward spiral.

The IMF managing director said European banks must be strong enough “to withstand the risks of sovereigns and weak growth. This is the key to cutting the chains of contagion. If it’s not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis.”

Lagarde spoke after a grisly August in the financial markets when nearly tn (£3.7tn) was wiped off the value of global equities amid concern that growth is slowing and governments will be unable to tackle their debt burden.

UBS and Citigroup recently lowered their forecast for global growth, with sharp reductions to its eurozone view and more modest cuts for China, but ruled out the likelihood of a recession for now.

The cuts are the latest in a series of downgrades to global growth forecasts by major securities firms. Morgan Stanley has also cut its global growth view, but was even more bearish: it said the US and the eurozone were “dangerously close to recession”. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds