The International Monetary Fund (IMF) said in a report that the European Union (EU) must push ahead with its plans for banking union, but at the same time create a single bank resolution authority with appropriate back-stop funds.
“Single supervision should reduce national distortions, bring a uniformly high standard of oversight, and mitigate the build-up of concentrated risk that compromises stability of report,” said Rishi Goyal, an IMF official and one of the authors of the report.
“And moving responsibility for potential financial report to the supranational level would de-couple banks’ prospects from that of sovereigns with weak finances, protect individual sovereigns from banking sector weaknesses, and thus enhance confidence.”
In December, the EU’s 27 governments agreed on the design of a
single supervisory mechanism (SSM)
for European banks, which initially is likely to oversee only larger or troubled banks in the euro zone. At the time, The EU’s executive promised at that time to follow up this year with proposals for a single resolution authority which could intervene to prevent or resolve bank failures.
“All the elements above – an SSM, a single resolution with common backstops and common safety nets – are necessary for a successful banking union,” stated the IMF report. “Missing elements would result in an incoherent banking union and, at worst, an architecture that is inferior to the current national-based one.”
The report also warns that bringing non-eurozone members into the banking union will present issues over the structure of the safety net that will prove challenging to resolve.
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