Europe's Solvency II rules would largely take insurers out of securitisation, penalising products that could help the credit-starved region. Regulators should reconsider the proposals, according to the Financial Times.
The Spanish economy contracted 0.3% in the first quarter, starting a double-dip recession. Meanwhile, Standard & Poor's downgraded the credit ratings of 11 banks. PIMCO CEO Mohamed El-Erian said Spain's crisis will "worsen into a vicious cycle" unless steps are taken to calm the banking system and change the labour market.
Moody's Investors Service is poised to downgrade the credit ratings of many banks, but Lloyds Banking Group and Royal Bank of Scotland are expected to take especially hard hits. Citigroup estimated that a rating cut at Lloyds would trim 16% from profits next year. The effect at RBS is projected at 8%. Citi forecast a 0.5% increase in financing costs because of the downgrades, cutting into profits.
European finance ministers are set to meet Wednesday to discuss Basel III capital rules for banks. Officials have struggled to reach an agreement on the rules, which will force banks to come up with billions of euros in capital. Sweden is expected to stand its ground on the right to subject banks to tougher capital rules. The disagreement highlights a challenge facing Europe as its financial sector permeates national borders, while many rescue efforts fall on individual countries.