EU must press ahead with bank oversight reforms: report

(BRUSSELS) - Europe has made real progress in setting up a single bank supervisory system but it is only a first step and provisions for winding up failed lenders and protecting depositors are urgently needed alongside it, a report prepared for the International Monetary Fund warned Wednesday.

In December, the eurozone agreed to set up a Single Supervisory Mechanism under the oversight of the European Central Bank as a first step toward a wider banking union, aiming to prevent any repeat of the debt crisis driven by the collapse of over-extended banks.

"Time is of the essence," with a banking union the "logical conclusion of the idea that integrated banking systems require integrated prudential oversight," said the report, written by IMF economists but which does not represent IMF policy.

Progress is necessary on all three elements -- supervision, winding up failed banks and depositor protection, it said, adding that the SSM must "ultimately supervise all banks".

The SSM negotiations were marked by sharp differences between France, which wanted all eurozone banks included, and Germany which wanted only several hundred of the biggest to be covered, at least initially.

Eurozone leaders also agreed on the need to set up a bank resolution and deposit protection system but there are concerns that with the debt crisis easing recently, the momentum for reform could slow.

The report said that if there is no provision for winding up banks and a safety net for depositors, "an SSM will do little to weaken vicious sovereign-bank links."

Failing banks were at the heart of the debt crisis as governments tried to keep them afloat with massive injections of capital, a step which only weakened their own financial position and in some cases, as in Ireland, forced them to seek an international bailout.

The report recommended that to head off fresh problems on this count, "it will be important to undertake as soon as possible direct recapitalisation of frail domestically systemic banks by the European Stability Mechanism."

The ESM, which became operational last year, is the eurozone's debt rescue backstop. Once the SSM is fully in place, expected by early 2014, the ESM will have the authority to intervene and inject funds into failing banks directly so as to head off any wider problems.

The report also picked up on importance of relations between the eurozone/SSM oversight system for the 17-nation eurozone and the 10 non-euro members, among them Britain which is home to one of the world's most important financial centres in London.

"A banking union is necessary for the euro area but accommodating the concerns of non-euro (members) ... will augur well for consistency with the EU single market," it said.

A Banking Union for the Euro Area