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By Edward Taylor and Arno Schuetze, Reuters
Leading bankers played down concerns an uneven economic recovery and planned stringent new capital rules could plunge the sector into more ructions.
Speakers at Germany's annual Banks in Transition conference on Wednesday gave scant credence to markets jitters that re-emerged this week and have focused on the financial sector.
European bank shares recovered a bit from losses the previous day, hit by renewed fears about lenders' sovereign debt exposure emerged after a Wall Street Journal article highlighted the weakness of industry-wide stress tests.
Uncertainty over the so-called Basel III bank capital rules also weighed on sentiment.
Axel Weber, a member of the European Central Bank's governing council and head of Germany's Bundesbank central bank, kicked off the conference by ruling out the possibility that any debt-strapped state in the euro zone would default on its debt.
"The sum of measures initiated by governments, in cooperation with the IMF (International Monetary Fund), should be enough to end discussions of a potential state insolvency in the markets," Weber said.
"I do not share fears of a double recession or deflation."
To help calm investor nerves, Ireland extended its guarantee for short-term bank liabilities, including corporate and interbank deposits, as expected on Tuesday.
Irish bond spreads had hit fresh peaks on Tuesday on renewed jitters about the health of the European banking sector exerting more pressure on Ireland.
In Greece, whose financial woes triggered a crisis of confidence in the euro, National Bank said it would raise 2.8 bln euros via a rights issue, a convertible bond, and asset sales to deal with the debt crisis.
NBG, which passed a European Union stress test in July, wants a stronger capital buffer to better cope with the recession at home and a liquidity quagmire that has forced Greek banks to rely on the European Central Bank as a lender of last resort.
STRESS
European regulators conducted stress tests of 91 banks in July that were designed to restore confidence in the region's banking sector but many investors remained sceptical of the test's credibility and banks are loath to repeat the exercise.
Europe ought to regularly test the abilities of its banks to withstand the kind of shocks that provoked the financial crisis, the European Union's financial markets chief, Michel Barnier, said in a newspaper interview.
Morgan Stanley Chief Executive James Gorman sought to assuage concerns in Europe that U.S. banks may try to skirt the tough new capital rules headed for final approval on Sunday.
"If there is a back door (to Basel III capital rules) I am not aware of it and I am definitely not walking through it. We are looking for global solutions," he said.
Gorman called for critics to tone down "the anti-banking rhetoric which only diminishes confidence among consumers and businesses alike".
"The banking industry is, obviously, at an incredible inflection point, arguably the most serious in its long history. At the same time, the global economy is slowly recovering from the financial crisis and the new regulations which Mr Weber and the other legal regulators around the globe have been driving will help accelerate that recovery," Gorman said.
Unicredit CEO Alessandro Profumo said because the Basel III negotiations had not yet been concluded, "it is impossible to say what will be the impact on profitability for our banks…We have to readjust our expectations in terms of return on equity".
Profumo told CNBC on the sidelines of the conference "there will not be a double dip" and he was "more worried about long-term growth".
Arturo de Frias, head of banks research at Evolution in London, said bearish sentiment left bank shares looking good.
"We are positive and think the (banking) sector is cheap…We also think returns are going to go up over the next three years," he told Reuters Insider in London.
"As well as this, most institutional investors we know are underweight and that's a good thing."
A Portuguese bond auction on Wednesday showed investors remained sensitive to peripheral debt risks as they demanded an average yield of close to 6% to hold 2021 Treasury Bonds,
"I think we can still see some skeletons in the closet in the European banking sector," said David Cohen, an economist at Action Economics in Singapore.
The Portuguese 10-year debt yield spread against benchmark German bunds hit its widest since May on Wednesday, while the 10-year Irish spread marked a new euro lifetime high at 389 basis points on Tuesday.
