EU leaders offer banks new guarantees for liabilities

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European leaders have given the green light for a sweeping public guarantee of bank funding in an attempt to head off the threat of another debilitating credit crunch. The measures are designed to ensure that banks continue lending to the real economy as officials attempt to solve the debt crisis.

Politicians at the emergency summit in Brussels said the banking sector would need access to ways of borrowing money for the long term to supplement short-term funding currently on offer at the European Central Bank (ECB) and national central banks.

To do so, they said guarantees on bank liabilities "would be required to provide more direct support" to some lenders seeking to borrow money for longer durations. And unlike three years ago, when various countries and national central banks implemented extraordinary liquidity measures to support the financial system, European leaders said "a simple repetition of the 2008 experience with full national discretion in setting up liquidity schemes may not provide a satisfactory solution under current market conditions".

"Therefore a truly coordinated approach at EU-level is needed regarding entry criteria, pricing and conditions," they said, calling on the European Commission and financial bodies such as the ECB and the European Banking Authority (EBA) to "urgently explore" ways of achieving this goal.

Analysts said coordinated action was needed owing to the lack of financial firepower available to troubled eurozone states such as Spain and Italy.

Although funding needs for 2011 have been "mostly addressed", the EBA said the market for longer-term funds was currently closed "due to increasing concerns over the sovereign situation and banks may find it difficult to address their funding needs in 2012".

"Confidence in the market needs to be restored," it explained. "This can only be done through a three-pronged approach: addressing the sovereign situation, through banks recapitalisation and term funding guarantees."

But analysts said details of how the continent-wide liquidity mechanism would work were thin on the ground.

The European Banking Authority said that most national guarantee schemes put in place during the 2008 financial crisis to backstop bank borrowing had turned a profit for the governments in question,