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IMF urges recapitalization of euro-zone banks

200px-International_Monetary_Fund_logo.svgThe International Monetary Fund urged European governments on Wednesday to allow the euro-zone bailout fund to recapitalize banks and criticized proposals that would force autonomous governments to provide insurance for recapitalization.

In December, 27 governments of the European Union agreed to establish a single supervisory mechanism — or SSM — that will likely oversee the region’s larger and/or troubled banks. The EU executive vowed to follow up this year on a proposal to create a single authority that could intervene, resolve or prevent bank failures, but in the meantime, sovereigns will continue to manage independent resolution and deposit insurance funds, Fox Business reports.

“All the elements above, an SSM, single resolution with common backstops and common safety nets—are necessary for a successful banking union,” the IMF said, according to Fox Business. “Missing elements would result in an incoherent banking union and, at worst, an architecture that is inferior to the current national-based one. A well-defined timetable at the outset would remove uncertainty, bolster confidence in the political willingness to build a robust financial stability architecture.”

The IMF report said that the resolution authority would require a “strong mandate” to intervene and a preset agreement regarding the division of costs between EU members. The resolution authority would also eventually require a disposal common deposit and resolution funds, which “could be relatively small and cover some individual bank failures,” Fox Business reports.

The IMF said that, in the meantime, the EU should consider the establishment of a temporary organization to oversee and coordinate troubled bank management and resolution between the European Central Bank and member state officials, adding that member states should not delay the recapitalization of banks by the European Stability Mechanism bailout fund. EU members said, however, that recapitalization will only be possible after the single supervisory agency is fully operational, which is expected to be within the first six months of 2014.

Olli Rehn, the vice president of the European Commission, said last month that euro-zone governments would have to “put skin in the game” if banks are to be recapitalized, a move strongly advocated by Germany.

“ESM investments should not benefit from loss protection provided by the sovereign,” the IMF said, according to Fox Business. “Such approaches would preserve sovereign banks line, undermining the purpose of ESM direct recapitalization.”

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