IMF says Europe's banking sector still fragile, need to implement, expand oversight of banks

PARIS – Europe’s banks are still fragile and the European Union has a way to go to make them stable, the International Monetary Fund said Friday in its first assessment of the continent’s financial sector.

The report said that, despite the progress made by the EU to repair its financial system, several challenges remain: banks are still struggling to get the loans they need to fund everyday operations, investors are still wary of European countries’ debt and growth is stagnant on much of the continent.

The IMF knows first-hand of Europe’s problems as a contributor to bailouts that rescued Greece, Portugal and Ireland. While some countries were brought down by overspending and taking on too much debt, banks have also played a pivotal role in Europe’s crisis.

The IMF report underlines what many have said before: EU countries need to sever that link between banks and governments.

In Ireland, for instance, it was the government’s attempt to rescue its troubled banking sector that forced the country into a bailout itself. Spain also had to take a loan from the 17-strong group of EU countries that use the euro so that it could afford to bolster its lenders’ capital reserves, which had been severely depleted by the country’s property crash.

The report examines plans by the EU to create a single supervisor for its banks. European leaders agreed in December that the European Central Bank would have oversight of financial institutions in the countries that use the euro and any others that wanted to join. But the IMF is pushing for the EU go further.

In addition to the supervisor, the IMF calls on the EU to create quickly an authority that can close troubled banks and outline the circumstances in which the European bailout fund can directly lend money to banks. The hope is that if banks can borrow directly from a European fund, then governments will no longer have to bankrupt themselves to bail out failing lenders.

European leaders have already said they want to create a so-called resolution authority and come up with a way to directly recapitalize banks, but they have disagreed on how robust to make these measures and how quickly to put them into place. The IMF’s call could add extra pressure to push them along.

The report is also pushing the EU to move faster on other issues. The report says the single supervisor should be in place by June with the ability to directly supervise any bank. The agreement negotiated in December indicated the supervisor might take up some of its functions this spring — although it hasn’t yet — and then would slowly ramp up operations over the following year.

The report warned that slow growth in Europe poses long-term risks for financial markets that have not yet adjusted their models. It particularly cited European insurance companies.

“Solvency in the insurance sector is under pressure from low returns and the stagnant economy,” it said.