Recapitalization counterproductive?

Deutsche Bank chief Josef Ackermann has criticized EU plans to recapitalize banks, saying this will not solve the current debt crisis in the eurozone.

Germany's top banker told a business conference in the German capital, Berlin, Thursday that the problem was not the capital resources of banks, "but the fact that sovereign debt has lost its status as a risk-free asset."

"The key to solving the problem therefore lies with governments, to be precise, in the restoration of confidence in the solidity of public finances," Ackermann said.

Counterproductive debate

Ackermann argued that the current debate on recapitalization was, in fact, counterproductive.

"On the one hand, it sends the signal that a debt 'haircut' is necessary," he said, "and on the other hand, the cash needed for recapitalization will almost certainly not come from private investors but the countries themselves." This, he added, would end up worsening a country's debt situation.

Ackermann insisted that he was not questioning the idea that increasing a bank's capital ration would strengthen it. But, he said, "the injection of capital does not tackle the real root of the problem."

He said forcing losses on banks and making them devote more money to their capital cushions could backfire by making them restrict credit to the rest of the economy.

The banker warned authorities not to over-regulate banks, saying that would result "in a less efficient financial sector and a deterioration in the supply of financing to companies and households."

Fears of banking collapse

On Wednesday, European Commission president Jose Manuel Barroso called on banks to increase their core tier-one capital ratios. He warned that those who did not do so could be forced to abandon bonuses and dividends.

Barroso said banks should first try to tap the private market to increase their capital, if necessary with government support. If such support was unavailable, he said, the eurozone's rescue fund, the European Financial Stability Facility (EFSF) could provide loans as a last resort.

His comments come as European officials try to keep Greece's financial troubles from sparking a widespread banking collapse.

Author: Timothy Jones (AP, AFP)
Editor: Andreas Illmer