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IMF: EU stability remains at-risk amid need for capital, resolution authority

200px-International_Monetary_Fund_logo.svgThe International Monetary Fund said last week that risks to the economic stability of the European Union remain “elevated,” adding that urgent action is required to provide enough capital to banks and establish a resolution authority.

The IMF said in its first-ever review of the 27 euro-zone member economies that the region has made progress in making changes and addressing weaknesses that fueled the financial crisis and delayed recovery but added that work remains to be done, as banks prepare to face more losses on loans in addition to losses on government bond-holdings, The Wall Street Journal reports.

“Risks remain elevated, especially in a context of low growth and fiscal retrenchment,” the IMF’s board of directors said, according to The Wall Street Journal. “Regulatory and policy uncertainty, and gaps in policy frameworks also continue to pose vulnerabilities. Further ambitious steps are thus necessary to rebuild confidence and achieve long-lasting financial stability in the region.”

The IMF recommended a review of banks’ assets “based on harmonized definitions of forbearance and non-performing loans.” Since the beginning of the financial crisis in the euro-zone, investors have remained wary of statements regarding the soundness of the region’s banks, which has discouraged them from providing funding to banks.

“The overstatement of asset quality has been one major cause of the banking crisis experienced by some EU countries,” the IMF said, The Wall Street Journal reports.

The review recommended the quick establishment of an EU-based resolution authority to remove the burden from taxpayers.

“Directors underscored the importance of creating without undue delay a Single Resolution Mechanism,” the IMF said, adding that many of its directors indicated a need for a “time-bound” plan to establish both the resolution authority and common deposit insurance fund, according to The Wall Street Journal.

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