BRUSSELS Dec 20 Europe must complete its plan
to create a banking union, improve stress testing of banks and
separate bank and sovereign risk to overcome the sovereign debt
and bank crisis, the IMF said on Thursday.
In an assessment of the European Union's financial sector,
the International Monetary Fund said the 27-nation bloc has made
significant progress in recent months to strengthen the sector,
but needed to complete the process without delay.
"The crisis reveals that handling financial system problems
at the national level has been costly, calling for a Europe-wide
approach," preliminary conclusions of the IMF report said.
The IMF praised Europe's decision to set up a single bank
supervisor (SSM) in the EU based on the European Central Bank,
but noted more was needed.
"The SSM is only an initial step toward an effective banking
union - actions toward a single resolution authority with common
backstops, a deposit guarantee scheme, and a single rule book,
will also be essential," the IMF said.
EU leaders have agreed to try to harmonise national
resolution procedures for dealing with banks in financial
trouble and also deposit guarantee schemes in the first half of
2013. During that year the European Commission is also due to
propose how to set up a single bank resolution fund for all
countries that take part in the SSM.
The IMF said European authorities should better test their
banks for scenarios of financial crisis or economic downturns.
"European stress-testing needs to go beyond micro-prudential
solvency, and increasingly serve to identify other
vulnerabilities, such as liquidity risks and structural
weaknesses," the IMF said.
"Confidence in the results of stress tests can be enhanced
by an asset quality review, harmonised definitions of
non-performing loans, and standardised loan classification,
while maintaining a high level of disclosure. Experience
suggests that the benefits of a bold approach outweigh the
risks," it said.
To stop the negative feedback loop between highly indebted
sovereigns bailing out their banks, which, in turn, buy the
sovereign's bonds, the IMF said the euro zone's bail-out fund,
the European Stability Mechanism, should quickly be able to
recapitalise banks directly, not through lending to sovereigns.
"Measures must be pursued to separate bank and sovereign
risk, including by making the ESM operational expeditiously for
bank recapitalisations," it said, reiterating its longstanding
EU leaders have agreed that the ESM would be able to
directly recapitalise banks as soon as the ECB effectively takes
over its supervisory duties, which is set for March 1, 2014.