BRUSSELS (MNI)- European banks in financially weaker countries will
pay less for state funding guarantees than those in stronger countries
under rules adopted by the European Commission on Thursday to ensure a
harmonized EU approach to government aid for the banking sector.

EU leaders and the European Banking Authority last month
recommended that governments stand ready to underwrite banks’ access to
short-term funding in a effort to prevent a liquidity crunch. Having
rejected a recommendation from the Commission and the pleas of some
countries to underwrite such guarantees at the European level, EU
governments have decided to back their own banks. The Commission’s rules
on Thursday are designed to ensure that countries provide guarantees
under the same set of conditions.

Under the rules, the average cost of liquidity guarantees for banks
across the EU will be approximately 1% of the amount guaranteed,
roughly 0.2 percentage point less than before. The fee is made up of a
0.4% basic fee, plus a top-up element based on individual bank’s average
CDS prices over the last three years, and the CDS spreads of the
sovereigns providing the guarantees.

The lower cost for banks in weaker countries is intended to reflect
the lower value of guarantees underwritten by their governments and to
prevent banks in stronger countries gaining a bigger funding advantage.

Banks that come to depend heavily on state guarantees for their
funding will have to submit a “viability review plan” to Brussels. EU
rules governing the charge that banks should pay for government cash to
support recapitalisations are unchanged, although the Commission did
seek to clarify several aspects.

“The exacerbation of tensions in sovereign debt markets has put
banks in the Union under renewed pressure,” said Joaquin Almunia, the EU
Competition Commissioner. “We will continue to insist on the
restructuring and cleaning up of balance sheets where it is necessary,
to help break the vicious circle between the sovereign debt crisis and a
weak financial sector.”

–Brussels bureau: +32495228374; pkoh@marketnews.com
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