LONDON, March 15 (Reuters) - The European Union must be bold in putting its banks on a stabler footing, starting with a tougher health check for lenders this year, the International Monetary Fund said.
The Washington-based watchdog said in its first ever formal study of the EU financial sector as a whole that the bloc had made significant progress but more was needed because financial stability remains fragile.
Its 67-page report published on Friday listed a string of reforms that needed completing this year, with heavy emphasis on banks' coming clean on troubled property loans and other assets.
"In the near term more forceful action is warranted to cement recent gains in market confidence and end the crisis," the IMF said.
The IMF carries weight, not least because it is a main architect of bail-outs of EU members Ireland, Portugal and Greece, where troubled banks have featured prominently. Banks have been a concern in Spain and remain so in Cyprus.
The report's tone contrasts with steadier nerves in Europe in recent months after European Central Bank President Mario Draghi promised to do all it takes to save the euro.
After a stress test last year forced lenders to hold more capital, policymakers' concerns have shifted to repairing national finances as shares in banks make a partial recovery.
The IMF said the priority should be on repairing banks' balance sheets and completing the reforms that EU leaders have promised. The fear is that bank balance sheets could get worse if there is no economic recovery.
"Moving banks and sovereigns jointly to safety is essential," said the report, which the EU requested.
"Progress towards strong capital buffers needs to be secured and disclosures enhanced," the IMF said, calling for some countries to review the asset quality of their banks.
It urged the EU to move quickly in setting up a planned banking union with the European Central Bank supervising euro zone lenders from next year. There are still disputes over detail.
To shield taxpayers, a single mechanism for winding down banks should be ready at the same time as the banking union comes into effect.
This will be a tough call as the EU won't propose a bloc-wide resolution authority until the summer and it could take months to pass into law.
The IMF also wants a common deposit guarantee scheme in the region - a red line for EU paymaster Germany.
The bloc was also urged to finalise a new mechanism for recapitalising ailing banks and adopt new EU bank capital and insurance rules. The capital rules won't be in place until at least January 2014, a year late.
HIDING BAD NEWS
The IMF puts heavy emphasis on the EU using this year's stress test of banks to plug flaws in previous exercises that left investors unconvinced that lenders were stable.
Despite EU banks raising more than 200 billion euros in the last stress test, markets still suspect some lenders have yet to fully recognise losses on some assets, the IMF said.
In a 32-page annex, the IMF said exactly how the EU should toughen up this year's test, urging the bloc to be "bold" and push for greater transparency even on sensitive data.
The European Banking Authority, which coordinates the test, said it has yet to fix a date or decide if the results should be published, as in the past.
The IMF made it clear that a test was a matter of urgency with publication of the results essential.
"To do otherwise would at best miss an opportunity to reduce uncertainty, which has contributed to the fragmentation of funding markets, and could lead to suspicions that the authorities have bad news to hide," the IMF said.
This year's test should also come up with clear recommendations on how to improve supervision rather than being framed as a "pass or fail", the IMF said.
It also wants safeguards to stop national regulators from trying to protect their banks during stress tests, as seen in Germany and Italy in the past.
The European Central Bank could play a "very active role" in this year's test and the EBA should deal directly with banks rather than having to go through national supervisors.
The IMF said that moves to separate banks' retail activities from riskier operations -- as seen in Britain, France and Germany -- were "no panacea".