The European Commission urgently needs to carry out thorough stress tests on banks in the wake of the Irish bail-out, former chancellor Alistair Darling said.
Financial regulators also need to be much more vigilant and monitor banks on a daily basis to ensure they are not taking undue risks and can withstand defaults, Mr Darling said.
He said the austerity measures imposed by governments in countries like Greece meant growth was unlikely and this posed a real risk to the wider banking system as they may not be able to service their debt, let alone repay it, the Labour MP told Radio 4’s Today programme.
He said he warned in the summer that the European Commission’s stress test for banks to see whether they could withstand defaults on loans was “completely ignoring” the connection between banks from different countries.
Mr Darling said: “I think it’s a matter of principle that the eurozone countries should be responsible for supporting the euro but that only gets us so far down the road.
“I think there are two problems that the eurozone has not dealt with. We do have an interest here, though not a direct financial interest, but a clear interest.
“One is the strength of the banks and I think the European Commission now needs to urgently re-do these stress tests and do them properly.”
Mr Darling said the Financial Services Authority had “learnt an awful lot” from the banking crisis but it needed to be “vigilant”, adding that the Irish banks were protesting until just before the bail-out was announced that they had enough capital.
He said: “When you are asking whatever bank, whether it’s strong enough to withstand defaults from whatever source, you have got to be asking that every day, not just periodically.
“Banks clearly have a duty to satisfy themselves that the bank can withstand stresses that it might be exposed to but experience here and in other countries shows that isn’t enough. You have got to get the regulators to ask some pretty tough questions.”