Banks Hobbled By Bad Debts Could Be Wound Down, Says Ec

European banks hobbled with hundreds of billions of toxic assets should be wound down or restructured, the European Commission said yesterday in new state aid guidelines for the EU's 27 governments.

Renewing her call for banks to come clean about the full scope of their impaired assets, Neelie Kroes, EU competition commissioner, said: "We should wind down banks that can't be saved."

Her internal market colleague, Charlie McCreevy, said: "If we don't face up to this issue then we risk prolonging this crisis with zombie banks that are incapable of performing a useful role in our economies."

The guidelines urge governments to limit costly schemes to banks of "systemic importance" and avoid busting their already overstretched budgets. Aid should be cut to the "strict minimum."

They come as the Treasury, the Royal Bank of Scotland and Lloyds TSB prepare to set out a £500bn insurance scheme for their toxic assets in return for increased lending after talks with Brussels.

But Gordon Brown, in a letter to EU leaders signaled a potential conflict by calling for the 27 countries to be allowed to "take the right action in light of their individual circumstances", writing that "robust action is needed to reduce uncertainty on bank balance sheets and restore confidence to the financial system."

Senior officials refused to estimate the scale of toxic assets held by EU banks but these could total trillions of euros.

The new guidelines state that the design of any asset relief scheme is up to each of the 27 countries but their treatment must be subject to uniform assessment criteria over which Brussels has the final say.

Kroes said: "Banks which need state support should not get unfair advantages over sound banks which didn't create this mess."