Europe-Wide Approach Will Make Financial System Safer

Stronger banks would reduce fragility of financial system, boost lending

Sustained momentum in building banking union would anchor stability, crisis management

Better coordination across agencies, countries would enhance policy agenda, strengthen

financial oversight

“Restoring financial stability in the European Union has not been easy, and

the priority is now to establish single frameworks for crisis management, deposit

insurance, supervision and resolution, with a common fiscal backstop for the banking

system, especially for the monetary union,” said Charles Enoch, Deputy Director

in the IMF’s Monetary and Capital Markets Department and head of the mission

that conducted the assessment.

Repair and reform

The IMF said policymakers and banks have made good headway to fix recent financial

problems in the European Union. But the region remains vulnerable, and policymakers

and banks need to intensify their efforts across a wide range of areas:

Bank balance sheet repair. Banks need to build strong capital buffers.

Greater disclosure requirements, especially of impaired assets, would buttress credibility

in the improvement in banks’ health. National authorities and the prospective

Single Supervisory Mechanism should undertake selective asset quality reviews, coordinated

at the European Union level. This would add credibility to the stress tests envisaged

by the Single Supervisory Mechanism and the European Banking Authority.

An effective banking union. Maintaining momentum to establish an effective

Banking Union will anchor financial stability and ongoing crisis management. Allowing

the European Stability Mechanism to directly recapitalize banks would help break

the adverse link between government finances and banks, which has caused so much

trouble in several European countries now undergoing painful adjustment. It will

be critical for the Single Supervisory Mechanism to deliver supervision of the highest

quality from the outset. Ultimately, its effectiveness will depend on strong governance

and common safety nets in the form of a single resolution authority and deposit

guarantee scheme. This recommendation builds on IMF research released in February 2013.

Stronger European Union financial oversight framework. Prompt passage

and implementation of capital requirements and resolution directives and regulations,

as well as strong coordination across the various oversight institutions are important

to achieve policy consistency, including...