Europe needs to purge weak banks to help to spur growth

By Thomas Atkins

FRANKFURT (Reuters) - Europe needs to stop propping up ailing banks and also have the courage to tackle lenders viewed as "too big to fail" if it wants to repair its financial sector and restore growth, leading bankers and regulators said on Monday.

European governments have been reluctant to wind down problem banks since the financial crisis and their efforts to support them has stifled rather than promoted economic growth.

Consolidation in Europe is overdue," Deutsche Bank Chief Executive Juergen Fitschen told an audience attending Euro Finance Week, a gathering of Europe's banking and policymaking elite, in Frankfurt.

"We have too many banks - also too many that are holding back progress because we've kept them alive for too long."

"Let us try to pressure all banks to find a successful long-term business model and those who don't succeed should be wound down in a sensible way."

The European Union's chief banking regulator agreed that not enough of the region's 6,000-plus banks had been allowed to fail.

"I am convinced that too few banks in Europe have been wound down and disappeared from the market so far. It has been fewer than 40 institutes, in the United States by comparison there were about 500," Andrea Enria, the chairman of the European Banking Authority (EBA), said in an interview with the Frankfurter Allegmeine Zeitung.

Germany's banking regulator Elke Koenig told bankers they should not assume that governments will step in to bail them out if they get into trouble, even if they consider themselves "too big to fail."

"We have to make progress on that front. Part of that is how much capital, which capital instruments and where, those banks must have to make them capable of being wound-down," Koenig said. "We need a change of mindset so that winding down of banks is always an option."

Hans-Dieter Brenner, the chief executive of Helaba, one of Germany's five state-backed Landesbanks, said he expected some of his rivals to disappear over the next few years and said three was the right number of Landesbanks for Germany.

"I do not expect that the consolidation process will be over yet in the medium term," Brenner said.

STRESS TESTS

The EBA is preparing tests on the finances of Europe's major banks next year in conjunction with the European Central Bank. The tests could potentially pave the way for more multibillion-euro fundraisings by the banks and also spur consolidation among the weaker players.

One potential trouble spot is how banks' holdings of government bonds will be dealt with in the stress tests. Government bonds used to be considered low-risk assets for banks to invest in, but this has changed in the wake of the euro zone sovereign debt crisis.

ECB Executive Board member Yves Mersch told Euro Finance Week that the ECB would treat government bonds as risk-free in its balance-sheet assessment, following current banking regulations.

But he said there had been no decision on the treatment of those bonds in the EBA stress tests which will follow the ECB's balance sheet review.

"We expect to look 3 years into the future (in stress tests)," he added. "We are going to test the banks according to a base-case scenario and a stress scenario."

"These assets' assessment will be based on market risk during the timeline of the stress tests."

Big banks are already attaching some risk to government bonds in their internal models, but the question is whether the risk-weightings are appropriate, particularly as there are big variations in how individual banks treat the same bond, Enria said in his interview.

"That won't do," he said, adding that the EBA would push for consistent and conservative valuations in the stress tests.

"We don't want banks to throw out their own risk models, but we need consistency," he said. (Additional reporting by Sakari Suoninen, Andreas Framke, Arno Schuetze, Alexander Huebner and Paul Carrel. Writing by Carmel Crimmins. Editing by Jane Merriman)