Banking union is essential, says IMF official

Ajai Chopra sets out the case for ambitious deepening of the euro zone

Ajai Chopra of the International Monetary Fund has reiterated his organisation's long standing calls for a full banking union in the eurozone. Speaking at a conference in Dublin on Thursday, the IMF's deputy director for Europe set out the "technocratic" case for a wide ranging banking union as means of putting the single currency on a sound footing.

Mr Chopra did not deal specifically with Irish issues but said that the euro zone's bailout fund – the European Stability Mechanism – should not be used to deal with "legacy" banking debts, but only for unexpected banking losses in the future.

The Irish Government has been pushing hard to recoup some of the costs of bailing out Irish banks via the ESM.

While acknowledging the many difficulties in designing and implementing such an ambitious project, he said that it was “essential” for the euro area, adding that he was “preaching to the converted” on this issue to an Irish audience.

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Although euro zone leaders “had not been idle” and have been “moving in the right direction” he said, the existing plans for banking union are much narrower than those the IMF has advocated.

Most notably, the plans do not include a common deposit insurance fund, one of the pillars of the comprehensive banking union advocated by the IMF. Such a fund should be financed by a levy on the euro zone’s 6,000 banks Mr Chopra said.

A potential of difficulty with current plans to give the European Central Bank powers to regulate the bloc's banks was that trades and/or conflicts of interest could arise between these two roles. However, this problem could be overcome if the structures of the expanded ECB were well designed he concluded.