The European Union's chief economy official said  on Tuesday that it was too soon to start work on a 'bad bank' to remove toxic assets and reactivate lending.

Joaquin Almunia, Economic and Monetary Policy Commissioner, urged EU member states to coordinate at EU level on what the 'bad assets' need to be dealt with and "what is the best way to value them" before rushing into creating it.

"The recent announcement of huge losses by some European banks has shown us that we are not out of the woods yet," Almunia told a financial services conference, referring to the financial crisis that has hit hard the global economy.

"We are hearing widespread reports of businesses being denied access to bank credit," he said, "Specific problems have been identified in financing large-scale infrastructure projects and for financing international trade."

He warned a breakdown in the credit market channel could make the current economic "slowdown even deeper."

Several member states were now considering how to solve the problem of toxic assets, which would continue to undermine confidence and hamper leading so long as they have remained on bank's balance sheets, he noted.

"Needless to say, this solution (of creating a bad bank) is not free of problems and it is just one among several possible avenues, " Almunia said.

Britain proposed last week to create a 'bad bank' to buy up the toxic assets to restore trust and kickstart lending.

"But I believe that before rushing into the 'bad bank' debate we have to coordinate at EU level our views on first, what are the 'bad assets' that we need to deal with, second, what is the best way to value them, and only then to address the issue of what is the best way to manage them," said Almunia.

At the same time, he stressed "at this point that any further aid to the banking sector must be based on the principle of transparency".

"If governments are to continue putting taxpayers' money into financial institutions, they must know from the outset the situation of that institution: its exposure to various risks, the quality of its asset portfolio and the sustainability of its business model in the long term," he warned.

EU states have so far recapitalized 300 billion euros in financial groups in an attempt to stabilize financial markets and help banks lend.

Almunia said banks had to be open about the risks they are holding if they are seeking any more government help.

(Xinhua News Agency January 28, 2009)