Dec. 20 (Bloomberg) -- The European Union faces “great challenges” and must press ahead with plans for a banking union to end its sovereign debt and financial crisis, the International Monetary Fund said today.
The IMF urged the EU to build a common system for stabilizing failing banks following this month’s agreement to give bank-supervision powers to the European Central Bank. A common bank backstop, deposit guarantee systems and more closely aligned financial regulations also are needed, the Washington-based lender said.
“The present conjuncture makes management of the situation particularly difficult,” the IMF said in preliminary conclusions of its first EU-wide financial sector assessment. “The crisis reveals that handling financial system problems at the national level has been costly, calling for a Europe-wide approach.”
European finance ministers last week agreed to put the ECB in charge of all euro-area lenders in a deal that paves the way for the currency bloc’s firewall fund to provide direct bailouts to banks. The policy makers’ goal was to break a vicious circle that undermined confidence in Europe’s banks.
The IMF said that enabling the region’s bailout mechanism to recapitalize banks directly should be done “expeditiously.” It also recommended improving and expanding stress tests for financial institutions so they can reveal “liquidity risks and structural weaknesses.”
-- Editors: Paul Badertscher, Gail DeGeorge