ROME, Italy - October 9, 2011 - The weakness of the European banking system came into focus over the weekend as the governments of France and Belgium agreed on a breakup plan for Dexia SA, a lender that had sailed through industry-wide stress tests three months ago only to become the first banking victim of the debt crisis.

The plan to save the Franco-Belgian lender came as French President Nicolas Sarkozy and German Chancellor Angela Merkel met in Berlin to try to hammer out a plan to recapitalize the European Union banks damaged by the crisis. Chancellor Merkel said EU leaders would do “everything possible” to ensure the banks have adequate capital.

EU banks have been hurt by waning economic growth and the plummeting values of their sovereign bond holdings. Many banks have been downgraded by ratings agencies and have lost a third to half their market capitalization in the last half-year.

While Chancellor Merkel and President Sarkozy professed to be in total agreement on the need to bolster the banks’ capital, the lack of details on Sunday suggested that the leaders of Europe’s two biggest economies had yet to reach common ground on the funding method. In a note published before the meeting, economists at ING Bank said, “This time around, it looks trickier to come up with a single straightforward message, as there is an increasing awareness that there is no silver bullet to solve the sovereign debt crisis.”

In general, Germany wants national governments to take the lead in boosting the capital of their country’s banks, while France favors drawing on the newly overhauled European Financial Stability Facility (EFSF), which has 440 million euros ($612 billion) in funding, an amount that may be leveraged up to 1 trillion euros or more.

Chancellor Merkel and President Sarkozy promised that a response to the banking recapitalization problem and the wider euro zone crisis would be unveiled no later than the Group of 20 summit in early November in Cannes, France.