Europe must complete work to end crisis

EUROPE must complete its plan to create a banking union, improve stress testing of lenders and separate bank and sovereign risk to overcome the debt crisis, the IMF said yesterday.

In an assessment of the European Union’s financial industry, 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.

It 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. 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,” it noted.