EU moots funding backstop for non-euro zone banks

By Jan Strupczewski

BRUSSELS (Reuters) - The European Union is considering using an EU fund for non-euro zone states with balance of payments problems as a backstop for banks in those countries that fail regionwide financial health checks, EU officials said.

The idea is part of a wider discussion on how to reassure investors that Europe will have enough money to bolster banks that will need recapitalising following next year's stress tests.

The 50-billion-euro (42 billion pounds) facility consists of funds raised by the European Commission on capital markets. Around 13 billion euros was disbursed to support Romania, Hungary and Latvia over the past three years.

"If a non-euro member state would be in need, the facility could help, even if a particular instrument for dealing with banking sector issues was not specified," one official said.

Britain is against using the balance of payments money for banks because London opposes what could potentially be seen a bailout, one EU official said.

Under plans to reassure financial markets about the financial health of European banks, the European Central Bank will check the balance sheets and assets of lenders in the euro zone before it takes over as their supervisor in November 2014.

That review will be followed by stress tests of all European Union banks, including non-euro zone ones, by the European Banking Authority, which will check if they would be capable of weathering another financial crisis.

Euro zone states can count on the currency bloc's bailout fund, the European Stability Mechanism (ESM), to be the lender of last resort if any of their banks needs more capital and neither markets nor the government in question can provide it.

Non-euro zone governments have no such backstop. That is why they would like the EU's balance of payments facility to be their own safety net, even if it was unlikely to be used.

Unlike the ESM, the balance of payments facility could not be used for direct bank recapitalisations. It could only lend money to a government, like the loan the ESM made to Spain last year, which was then invested in the country's banking sector.

Another problem is that the money is explicitly earmarked to help governments with balance of payments problems rather than bank capital issues.

But the need for an urgent solution is lessened by the fact that banks in central Europe, especially in Poland, are less likely to need any help because they are on average better capitalised than their counterparts in the euro zone.

Furthermore, many banks in central Europe are subsidiaries of euro zone banks rather than branches, meaning they cannot be used as cash cows by their parent companies.

This should prevent a domino effect in the case of a parent bank based in the euro zone needing funds after the stress test.

(Reporting By Jan Strupczewski; Editing by John Stonestreet)