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EU gives nod to French bank fund

(Agencies)
Updated: 2008-12-09 08:12

EU regulators Monday cleared France's multibillion-euro fund to shore up banks and ease lending, as they set out new rules requiring banks with riskier investments to pay a higher fee for government cash bailouts.

EU Competition Commissioner Neelie Kroes said she also expected Germany to toughen the terms of a financial rescue plan for Commerzbank before the EU could clear it.

Banks are eager to shore up their positions with massive capital injections that governments have promised them to try and ease lending. They say they need this to continue to keep lending to customers in the wake of a financial crisis that paralyzed credit markets.

But EU regulators said they had to check carefully that the bailouts won't benefit the banks that get state aid over rivals that cope without.

The European Commission said it wants each bank should pay a premium for the money it receives, based on its risk profile. Banks in distress that are near insolvency should pay more for state support and face stricter safeguards.

The EU's executive has to clear major state subsidies to private companies to make sure they don't profit at the expense of rivals and trigger competition problems.

It approved France's capital injection program after Paris hiked the fees it charges healthy banks. Regulators said this would encourage the banks to turn to private lending as soon as they can.

France will invest in securities issued by banks and will be paid back at a fixed rate averaging around 8 percent for five years and a variable rate after that. Different rates will be set for banks based on their risk of defaulting on the loan.

The fund is capped at 21 billion euros although France only plans to spend 10.5 billion euros initially. Banks taking part must curb what they pay executives and traders and ban all severance payments to senior executives when the bank has collapsed.