June 19, 2014 / 6:51 PM / 3 years ago

IMF tells Europe to strengthen banking union

* ECB to take on policing of big euro zone banks

* IMF says more firepower needed for failing lenders

BRUSSELS, June 19 (Reuters) - The European Union needs a strong system in the euro zone to handle big banks that get into trouble, the International Monetary Fund said on Thursday, highlighting what many experts see as the weak point of the EU’s banking union.

The European Central Bank will begin supervision of big banks across the 18 countries using the euro later this year, the first step in banking union.

The next step will be a common approach to preventing banks in trouble from dragging down the governments of euro zone countries, as happened with Ireland. That step remains a work in progress. So far, only a small emergency fund exists.

While welcoming ‘substantial progress’ on banking union, the International Monetary Fund, which helped bankroll the bailouts of several euro zone countries, including Ireland, highlighted its shortcomings.

“Work needs to continue to establish a common backstop to sever effectively sovereign-bank links,” IMF officials wrote in their regular review of the euro zone economy. “The current planned backstop may prove insufficient to break decisively bank-sovereign links.”

The IMF said that it should be easier for the euro zone’s rescue fund, the European Stability Mechanism, to help struggling banks directly, rather than lending money to the banks’ home countries.

It also underscored the need to have sufficient funding to handle a large bank that gets into trouble. (Reporting By John O‘Donnell; Editing by Larry King)

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