Public debt problem must be solved, says Santander chief

Botín warns of risks from more bank recapitalization and calls for end to additional regulation

Banco Santander Chairman Emilio Botín on Tuesday came out strongly against the "indiscriminate" recapitalization of European banks and insisted that the core problem remained the euro-zone sovereign debt crisis.

In a speech delivered to an international banking conference, Botín acknowledged that some banks might need more capital because of their exposure to Greek government debt or because of the crisis in general.

"However, there should not be obligatory, indiscriminate recapitalization of the European banking sector without resolving the problem of public debt once and for all," he said.

"Casting doubt in a general manner on the sustainability of public debt or of the European financial system may bring us to a ceaseless downward spiral of sovereign debt and banking crises," Botín added.

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Both European Commission President José Manuel Durão Barroso and outgoing European Central Bank President Jean-Claude Trichet have argued the need for Europe's banks to recapitalize. The European Banking Authority (EBA) is considering raising the minimum core capital required for banks in stress tests to 9 percent from the figure of 5 percent used in July's examination.

However, Botín said such proposals would "increase market uncertainty, and, finally [...] produce a contraction of credit, since many institutions will opt to reduce their balance sheets."

The head of Spain's biggest lender said recapitalization would also undermine what had been agreed under Basel III and the stress tests carried out by the EBA in July.

Botín's speech in Santander's headquarters, just outside Madrid, was delivered to a number of high-profile figures, including the EBA chairman, Andrea Enria, the vice president of the European Commission, Joaquín Almunia, Spanish Economy Minister Elena Salgado and José Viñals, the director of the IMF's monetary and capital markets department.

Botín warned supervisors about being over-zealous in strengthening regulations. "Now is the time to apply the brakes to additional regulation and to assess the impact of the measures that have already been implemented," he said. Over-regulation risks "strangling economic growth," he continued, noting that "retail banking is a key engine of economic growth."

He also said that too much emphasis on tighter rules could distract the authorities from the need to strengthen supervision of the banks. "I have said many times that no amount of regulation can compensate for poor supervision," he added.

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