EU to test bank capital for Greek losses

European Union finance ministers have asked the bloc's bankingsupervisor to draw up a report on banks' capital levels, a European officialsaid Thursday, amid fears that the worsening debt crisis could trigger anothercredit crunch.

Banks'ability to survive steeper losses on Greek debt will be one of the scenariosassessed in that report, the official said, adding that ministers plan todiscuss the results at their next meeting in early November. The official wasspeaking on condition of anonymity because of the sensitivity of the issue.

GermanChancellor Angela Merkel said Wednesday she was in favor of a coordinatedrecapitalization of European banks if that was deemed necessary.

Speculationthat Europe is looking at a coordinated plan to recapitalize its banking sectorhas been the main reason why stock markets have rallied over the past couple ofdays following a dismal start to the week.

Franco-Belgianbank Dexia SA has been at the forefront of investor concerns this week over itsexposure to potentially bad government debt and its share price has been undersevere pressure. The French and Belgian governments have indicated that somesort of deal to save the bank could be announced later Thursday.

TheInternational Monetary Fund, a key player in the eurozone debt crisis, saidlenders across the continent may need as much as euro200 billion ($267 billion)to boost their capital cushions enough to restore a loss of confidence in thesector.

Someof that money could come from private investors via capital increases, butanalysts expect that governments may have to put up significant amounts forlenders than can't raise money on the markets.

TheEU disputes the IMF 's euro200 billion estimate, but has nevertheless beenpushing for a more coordinated response to the worsening conditions in thecontinent's banking sector, where lending between banks and from banks tobusinesses is threatening to freeze up in a manner similar to the aftermath ofthe collapse of U.S.investment bank Lehman Brothers in 2008.

However,some countries have been slow to set up sufficient backstops for their lenders,reluctant to commit more public money as they are already under pressure overtheir high debt levels.