News / Europe

EU Must Speed Up Banking Union to Gain Trust, IMF Says

People walk outside the International Monetary Fund headquarters at the start of the annual IMF-World Bank fall meetings in Washington, Oct. 8, 2013.
People walk outside the International Monetary Fund headquarters at the start of the annual IMF-World Bank fall meetings in Washington, Oct. 8, 2013.
TEXT SIZE - +
Reuters
The International Monetary Fund urged the European Union to quickly set up an agency that would close or salvage troubled banks across the continent as part of an effort to shed a mountain of bad debt impeding economic recovery.
 
The recommendation - one of a long list to address structural faults in the world economy - comes as European Union lawyers raised concerns about the plan to set up a so-called banking union.
 
Banks in euro-zone countries hit hardest by the debt crisis were forced to raise interest rates on risky loans to clients who had difficulty paying already, further worsening the chance they would get their money back, the IMF said.
 
“Investors' faith in euro-area bank balance sheets must be restored ... and banking union completed,” the IMF said in its  Global Financial Stability Report on Wednesday.
 
“Otherwise, the euro area risks entering a lengthy, chronic phase of low growth and balance sheet strains,” it said in the report, which comes out twice a year.
 
The EU should also conduct rigorous probes - so-called stress tests - into the health of its banking sector, the IMF said, and identify ahead of time who would fill any capital shortfalls, in order to lend the exercise more credibility.
 
The EU will take the first step towards the banking union next year, when the European Central Bank takes on supervision of banks throughout the euro zone, something that is now divided between dozens of national agencies.
 
But the IMF said a second pillar of the project - the creation of an agency to close troubled banks and a central fund to help pay for the costs of the clean-up, or Single Resolution Mechanism - was equally essential.
 
“[The current situation] places the burden of raising capital firmly back on bank shareholders and creditors or on the sovereign ... or on both, and, thus, may not provide sufficient backstop,” the IMF said in the report.
 
EU lawyers are concerned that setting up a framework that would break the link between indebted countries and their banks raises an array of political and legal complications, mainly about who would foot the bill.
 
The latter point is of particular concern to Germany, the euro zone's largest economy.
 
The IMF also said the EU should improve its insolvency laws and debt workout arrangements and help companies seek financing from sources other than bank loans - for instance through corporate debt markets.
 
In a test run, the IMF estimated that Spanish banks could face an estimated 104 billion euros ($141.40 billion) in losses on company exposure in the coming two years, though this amount is fully covered by loss provisions.
 
In Italy, the estimated gross loss could exceed the provisions by 53 billion euros, and in Portugal by 8 billion euros. In both cases, those losses could be absorbed from operating profits without eroding capital.
 
The IMF's report was a broad-ranging review of possible risks to a wide range of sectors in the global economy, with one key possible cause of disturbance being a retreat by the U.S. Federal Reserve from its easy monetary policy.
 
The shadow banking system - a loosely defined set of unregulated entities that function like banks - remained a potential source of systemic stress, the IMF said, as did the so-called repo market, which is part of it.
 
The IMF singled out mortgage real estate investment trusts (REITs) as one particular cause of concern, being prone to asset fire sales because they provide long-term debt that they fund in volatile short-term debt markets.

You May Like

Russia-Ukraine Crisis Could Trigger Cyber War

Why Europe and the US may be "whistling past the graveyard?" More

Egyptian Court Jails 23 Pro-Morsi Supporters

Meanwhile, Egyptian officials say gunmen have killed two members of the country's security forces More

Pakistani Journalists Protest Shooting of Colleague

Hamid Mir, a host for private television channel Geo, was wounded after being shot three times Saturday, but is expected to survive More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Ukraine, Russia, United in Faith, Divided in Politicsi
X
Michael Eckels
April 19, 2014
There is a strong historical religious connection between Russia and Ukraine. But what role is religion playing in the current conflict? In the run-up to Easter, Michael Eckels in Moscow reports for VOA.
Video

Video Ukraine, Russia, United in Faith, Divided in Politics

There is a strong historical religious connection between Russia and Ukraine. But what role is religion playing in the current conflict? In the run-up to Easter, Michael Eckels in Moscow reports for VOA.
Video

Video Face of American Farmer is Changing

The average American farmer is now 58 years old, and farmers 65 and older are the fastest growing segment of the population. It’s a troubling trend signaling big changes ahead for American agriculture as aging farmers retire. Reporter Mike Osborne says a new report from the U.S. Census Bureau is suggesting what some of those changes might look like... and why they might not be so troubling.
Video

Video Donetsk Governor: Ukraine Military Assault 'Delicate But Necessary'

Around a dozen state buildings in eastern Ukraine remain in the hands of pro-Russian protesters who are demanding a referendum on self-rule. The governor of the whole Donetsk region is among those forced out by the protesters. He spoke to VOA's Henry Ridgwell from his temporary new office in Donetsk city.
Video

Video Drones May Soon Send Data From High Seas

Drones are usually associated with unmanned flying vehicles, but autonomous watercraft are also becoming useful tools for jobs ranging from scientific exploration to law enforcement to searching for a missing airliner in the Indian Ocean. VOA’s George Putic reports on sea-faring drones.
Video

Video New Earth-Size Planet Found

Not too big, not too small. Not too hot, not too cold. A newly discovered planet looks just right for life as we know it, according to an international group of astronomers. VOA’s Steve Baragona has more.
Video

Video Copts in Diaspora Worry About Future in Egypt

Around 10 percent of Egypt’s population belong to the Coptic faith, making them the largest Christian minority in the Middle East. But they have become targets of violence since the revolution three years ago. With elections scheduled for May and the struggle between the Egyptian military and Islamists continuing, many Copts abroad are deeply worried about the future of their ancient church. VOA religion correspondent Jerome Socolovsky visited a Coptic church outside Washington DC.
Video

Video Critics Say Venezuelan Protests Test Limits of Military's Support

During the two months of deadly anti-government protests that have rocked the oil-rich nation of Venezuela, President Nicolas Maduro has accused the opposition of trying to initiate a coup. Though a small number of military officers have been arrested for allegedly plotting against the government, VOA’s Brian Padden reports the leadership of the armed forces continues to support the president, at least for now.
Video

Video More Millenials Unplug to Embrace Board Games

A big new trend in the U.S. toy industry has more consumers switching off their high-tech gadgets to play with classic toys, like board games. This is especially true among the so-called millenial generation - those born in the 1980's and 90's. Elizabeth Lee has more from an unusual café in Los Angeles, where the new trend is popular and business is booming.
Video

Video Google Buys Drone Company

In its latest purchase of high-tech companies, Google has acquired a manufacturer of solar-powered drones that can stay in the air almost indefinitely, relaying broadband Internet connection to remote areas. It is seen as yet another step in the U.S. based Web giant’s bid to bring Internet to the whole world. VOA’s George Putic reports.
AppleAndroid