Yesterday, European Central Bank (ECB) Executive Board Member, Lorenzo Bini Smaghi, delivered a speech in Madrid in which he encouraged European authorities to backstop their commitment to restore confidence by implementing a “rapid” program of “abundant and generalized” bank recapitalizations. However, Mr. Smaghi cautioned “such state intervention is not aimed at saving one or a few ailing banks; it is aimed at preserving systemic and macroeconomic stability” and must go “far beyond prudential requirements” to a “two-digit” Tier 1 capital ratio.
Mr. Smaghi also announced that the “ECB has established a scheme for defining an appropriate return on different instruments that could be used for recapitalization, which has been sent to Member States and the European Commission. We hope that this scheme can be adopted in all Member States, in particular those in the euro area. Indeed, ensuring a level playing-field across banks and countries is essential to foster the return of confidence.”