IMF says European plans to deal with bank failures inadequate

EUROPEAN PLANS on how to deal with bank failures are inadequate, especially for cross-border bankruptcies, the International Monetary Fund said yesterday.

"When banks are insolvent you (Europe) have a . . . formula that is not specific enough and it will not be enough when there is a cross-border (problem)," said the IMF director in charge of capital markets, Jaime Caruana.

"There should be some political impetus so these questions are properly addressed," Mr Caruana said, adding that central banks needed to be given better access to supervisors' information on the health of the banking system.

Investors' fears that Europe would suffer US-style bank failures stepped up yesterday as Belgian-Dutch bank Fortis denied it faced a liquidity crisis and said it would sell off more assets as its shares fell to a 14-year low.

ECB executive board member Lorenzo Bini Smaghi, speaking at the same financial market conference, said supervisors needed to be forced by law to work with central banks, and said global financial regulation was plagued with conflicts of interest.

Banks had poured money into political lobbying to block tighter regulation, while national governments tried to boost the standing of their domestic financial centres by offering laxer rules than their rivals, he said. "The problems are everywhere . . . the whole system needs a complete overhaul," Mr Bini Smaghi said.

Jonas Niemeyer of the Swedish central bank said the European Union needed a single bank regulator, but resisted the idea that the ECB should play that role.

The IMF was gloomy about the economic outlook for Europe and predicted it will probably take longer than the US to recover from the financial turmoil.

Economic data is increasingly pointing towards a European Central Bank rate cut early next year, said Alessandro Leipold, of the IMF. "Our baseline scenario involves a certain weakening of growth, a receding of inflationary pressures so the scope for cutting rates would gradually emerge. Certainly the latest financial market events have reinforced that assessment," he said.

- (Reuters)