Mervyn King: 'Last chance for European banks to restore their credibility'

Former Bank of England governor Lord King (PA)

Former Bank of England governor Mervyn King has warned European banks are facing a “last chance” to convince financial markets they are solvent as a rescue plan was launched for Portugal’s Banco Espirito Santo.

The European Central Bank is due to publish the results of its latest “stress test” of 128 European lenders in late October and will assess the actions financial institutions have taken to bolster their capital buffers.

“What will be disappointing is if the review comes up with very reassuring answers about the banking system that markets clearly don’t believe,” said Mervyn, Lord King speaking in Australia.

“The previous stress tests for banks in Europe didn’t really convince markets of their seriousness — and this is really a last chance for Europe to put in place a credible set of tests on the financial worthiness of all the banks in Europe.”

He added: “Financial markets will be looking very carefully in the autumn at whether the statements made about the capital positions of different banks are credible and a lot hangs on this.”

The warning came as Portugal’s central bank announced plans for a good bank/bad bank split for Espirito Santo, the country’s largest listed lender.

Portugal’s bailout fund, provided by the European Union and the International Monetary Fund, will lend €4.9 billion (£3.9 billion) to the good bank, which will be called Novo Banco. Depositors will be protected but shareholders will be wiped out.

“The plan carries no risk to public finances or taxpayers,” said Carlos Costa, Portugal’s central bank governor at a news conference in Lisbon last night. “There was an urgent need to adopt a solution to guarantee the protection of deposits and assure the stability of the banking system” he added.

The ECB President, Mario Draghi, said earlier this year that a number of other European banks are likely to fail this autumn’s stress test and will be required to raise more capital.