The International Monetary Fund called on the European Central Bank and euro-area authorities to stand behind deposit insurance within the currency area to help a common backstop take effect and forestall bank runs.
European leaders should make banking union their immediate priority in the efforts to fight the debt crisis, the IMF said in staff reports today related to its annual review of the euro area. The Washington-based lender called for a rapid announcement of a timetable toward common deposit insurance, initially supported by the ECB or some other joint resource until it could eventually be funded by the banks.
Existing bank backstops are nationally based and don’t go far enough to reassure customers that their money is safe, the IMF staff said. Cross-border deposit insurance, preferably accompanied by a centralized bank resolution agency, would keep weaker nations from running up against insolvency if their largest lenders run into difficulties.
“The key problem in the euro area is the excessive reliance of banks and sovereigns on each other for finance,” said Mahmood Pradhan, deputy director of the IMF’s European Department, in the report. “A strategy to break this link by supporting weak banks through common resources and a complete banking union would demonstrate a clear commitment by euro-area policy makers to ensure the viability of the monetary union.”
European Union nations have provided 4.5 trillion euros ($5.5 trillion) in capital injections, guarantees and other forms of state support to their lenders since the 2008 collapse of Lehman Brothers Holding Inc. Global regulators have called for losses to be imposed on banks’ creditors as part of a set of measures to prevent any repeat of these taxpayer bailouts.
Today’s IMF reports called on the EU to deepen its fiscal integration while pursuing forms of banking union. Countries on the EU periphery such as Spain, Greece and Ireland face a downward spiral that encompasses banks, sovereign debt and the real economy, the fund said.
“Concerns about bank solvency remain large where the domestic sovereign is weak,” the reports said. “Weak sovereigns, in turn, are unable to backstop failed banks without jeopardizing their sovereignty.”
The ECB could take on the role of common bank supervisor, IMF staff said. This would reduce the links between banks and governments that are built into the current system of so-called Emergency Liquidity Assistance for banks that can’t find financing elsewhere. The IMF staff said the ECB could delegate some tasks to balance a lender-of-last-resort role against its need to maintain independence.
As a transitional liquidity backstop for deposit insurance and bank resolution funds, the euro area could turn to the ECB or another pool of public resources until industry levies have raised enough money, the reports said. The IMF also called on the euro area to “urgently” move ahead with plans to allow the region’s firewall funds to lend directly to banks.
In the long run, the euro area should put in place bank- financed funds to cover the costs of failing lenders, the IMF says in the report. In case these prove insufficient, the funds should be backed-up by public money that could be tapped as a last resort source of liquidity, it says. This could come from “government-provided resources” such as joint debt or the euro area firewall funds, or from the ECB.
EU leaders said last month that they may let the European Stability Mechanism, the currency region’s 500 billion-euro rescue fund, lend directly to banks if there’s a framework for common bank supervisor that includes an expanded role for the ECB. Olli Rehn, the 27-nation EU’s economic and monetary affairs chief, has said that the commission will present a draft law by early September to create such a single supervisor.
EU nations are required by law to guarantee bank deposits up to 100,000 euros. Michel Barnier, the EU’s financial services chief, proposed in 2010 to reinforce these plans by requiring lenders to pay into standing national funds that would reimburse savers if their bank fails.
Barnier’s plans have to be approved by the European Parliament and by national governments in the bloc before they can come into effect.
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