Europe must move quickly towards completing its banking union with a credible common backstop or risk undermining its new single bank supervisor, the International Monetary Fund said yesterday.

In a discussion paper setting out a path to overhaul the eurozone’s financial sector governance, the IMF staff warn of the dangers of leaving the project half-finished, either through political compromises or a loss of momentum.

Euro zone countries last year agreed the framework for the European Central Bank to become a common bank supervisor, in what was the biggest step towards financial integration since the creation of the euro.

Uncertainty

However, there remains uncertainty over the pace and ambition of member states to put in place the other legs of a fully fledged banking union: a single authority to wind up banks, a common backstop during crises and a shared safety net for depositors.

“All the elements above – an SSM [single supervisory mechanism], a single resolution with common backstops and common safety nets – are necessary for a successful banking union,” said the IMF paper.

“Missing elements would result in an incoherent banking union and, at worst, an architecture that is inferior to the current national-based one.”

The IMF’s vision for full banking union is a long-term project, which it suggests would require changes to EU treaties to allow mutualisation and establish a powerful central authority to close down banks.

Given the urgency of financial problems afflicting the eurozone, the IMF supports a host of transitional measures, including direct recapitalisation of some ailing banks to ease the pressure on the balance sheet of sovereigns.

– Copyright The Financial Times Limited 2013