IMF urges deposit insurance plan
Kenmare (Ireland), October 16, 2011
The International Monetary Fund (IMF) has called for an EU-wide deposit insurance scheme and more co-ordinated regulation of the continent's banks to prevent contradictory national regulation from exacerbating its debt crisis.
Global markets have been rocked in recent weeks by fears the euro zone sovereign debt crunch could cause a pan-European banking crisis, prompting some European leaders to call for the joint recapitalisation of the largest banks.
A common bank crisis management system, a supra-national resolution regime and common deposit insurance rules would help significantly stabilise the banking system, IMF's European Department deputy director Ajai Chopra said.
'Steps taken and contemplated (so far) do not go far enough. Modest reforms are not sufficient in the current environment,' Chopra said during a speech in Kenmare, southwestern Ireland.
'The crisis requires convincing sceptical markets that Europe can make bold and unified decisions.'
Chopra is in Ireland for the country's latest quarterly review under its 85 billion euros ($118 billion) EU-IMF bailout. The outcome of the review will be published late next week.
He said the Irish government had come to grips with its banking problems but that weakness in the domestic economy remained a concern.
'Unemployment is still very, very high until unemployment also starts to come down, we shouldn't start to pop the champagne,' he said.
Ireland's unemployment rate is more than 14 per cent, compared to 4.6 per cent in 2007 - before a property bubble burst and the economy was brought to its knees.
To prevent weakness in Europe's peripheral countries morphing into a banking crisis, Brussels needs to up its game in terms of regulation, he said.
The IMF believes a deposit insurance scheme should be introduced in parallel to an increased harmonisation of deposit insurance schemes in the member states to ensure sovereign problems don't trigger destabilising bank runs, he said.
The scheme could be funded by a harmonised bank levy on selected bank liabilities or a financial activity tax, he said.
EU leaders should also introduce a binding bank crisis management and resolution regime to reduce the risks of problems at bank's that operate across the continent.
'A common pan-European backstop would help break the link from the balance sheet of banks to the balance sheets of the sovereign,' Chopra said.
The European Banking Authority should be granted supervisory authority and potentially resolution authority for all banks with cross-border activities, he said.-Reuters