Eurobanks brace for calls to raise capital

BRUSSELS/PARIS (Reuters) – Europe’s banks expect to be told to raise more capital under a Franco-German effort to solve the euro zone debt crisis after the state rescue of Franco-Belgian lender Dexia SA.

Dexia agreed to the nationalization of its Belgian retail bank and secured 90 billion euros ($121 billion) in state guarantees, in a rescue that raises pressure on other euro zone countries to strengthen their banks.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said on Sunday they would tackle Greece’s woes and agree how to recapitalize the regions’ banks by the end of the month, but they declined to reveal details of their plan.

“We expect the EU to come up with a minimum core Tier One (capital) level under certain stress scenarios and a higher one without any stress. Then banks will be asked to reach this level in a short period of time,” said a senior banker in Germany.

Banks were not involved in talks yet with governments on likely capital needs, several bankers said, although options were being considered in case they need to act quickly.

But they were concerned at just how much more capital they will be called on to find, after many urged Europe’s leaders to follow the “bazooka” approach of former U.S. Treasury Secretary Hank Paulson, who told banks they must raise capital.

British Prime Minister David Cameron told his euro zone peers to adopt a “big bazooka” solution.