THE International Monetary Fund said for the second time this week that European leaders must agree to separate bank and sovereign risk to overcome the current financial crisis.
The fund's plea, which will be music to the ears of the Government here, came in a report on Europe's banking sector. The Washington-based organisation made a similar demand in a report on Ireland published on Wednesday.
Yesterday, the IMF said Europe must also complete its plan to create a banking union and improve bank stress tests.
In an assessment of the EU's financial sector, the IMF said the bloc has made significant progress in recent months, but needed to complete the process.
The IMF also said the way the crisis was dealt with in Europe has been extremely costly.
The IMF praised Europe's decision to set up a single bank supervisor (SSM) in the EU based on the European Central Bank, but said 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 in the SSM.
The IMF said European authorities should better test their banks for scenarios of financial crisis or downturns.
To stop the negative feedback loop between highly indebted sovereigns bailing out their banks, who, in turn, buy the sovereigns' bonds, the IMF said the eurozone's bailout fund, the European Stability Mechanism (ESM), should quickly be able to recapitalise banks directly, not through lending to sovereigns.
EU leaders have agreed that the ESM will be able to directly recapitalise banks as soon as the ECB effectively takes over its supervisory duties, which is set for March 1, 2014. (Additional reporting Reuters)