IMF says euro zone re­mains vul­ner­a­ble

The Pak Banker - - COMPANIES/BOSS -

Euro zone re­mains vul­ner­a­ble to shocks be­cause of weak banks and in­com­plete reg­u­la­tory safe­guards, the In­ter­na­tional Mon­e­tary Fund said Tues­day, in a warn­ing to Euro­pean lead­ers not to slacken their ef­forts to build a more re­silient fi­nan­cial sys­tem.

In its first of­fi­cial as­sess­ment of the Euro­pean Union fi­nan­cial sys­tem, the IMF urged po­lit­i­cal lead­ers to show re­solve in ad­dress­ing the re­main­ing weak­nesses in the struc­ture of the euro zone. Un­fin­ished tasks in­clude cre­ation of a mech­a­nism for wind­ing down failed banks, and a sys­tem to guar­an­tee cus­tomer de­posits in or­der to pre­vent runs on banks, the IMF said. The fund praised the de­ci­sion by euro zone lead­ers last year to con­cen­trate bank su­per­vi­sion in the hands of the Euro­pean Cen­tral Bank, rather than solely with na­tional reg­u­la­tors who have some­times been re­luc­tant to im­pose tough mea­sures on their home banks. But, in a 60-page report, the fund also said that a lot of work re­mained to be done. "More force­ful ac­tion is war­ranted to ce­ment re­cent gains in mar­ket con­fi­dence and end the cri­sis," the IMF said.

The fund was once known pri­mar­ily for deal­ing with fi­nan­cial and debt crises in poor na­tions, but in re­cent years has fo­cused more of its re­sources on Europe and the cri­sis in the euro zone. As the report Fri­day il­lus­trated, the IMF. and its pres­i­dent, Chris­tine La­garde, have been in­creas­ingly will­ing to lec­ture Euro­pean lead­ers on how they should com­bat the cri­sis.

Many of the weak­nesses pointed out by the IMF in the report were fa­mil­iar. Among them was a de­pen­dence by banks on whole­sale fund­ing from money mar­kets, which ex­pe­ri­ence has shown can dry up quickly in a cri­sis.

The IMF also ex­pressed con­cern that some banks may not have fully dis­closed pos­si­ble losses from bad loans or risky in­vest­ments. The or­ga­ni­za­tion urged banks to con­tinue rais­ing cap­i­tal, so that they are bet­ter able to ab­sorb losses.

"Legacy as­sets re­main a prob­lem in many E.U. coun­tries," the report said. The IMF. did not spec­ify which kinds of as­sets it meant, but some of the well-known cat­e­gories in­clude real es­tate mort­gages in coun­tries like Spain or loans to the de­pressed ship­ping in­dus­try by Ger­man, Bri­tish and Scan­di­na­vian banks.

To be an ef­fec­tive bank reg­u­la­tor, the fund said, the E.C.B. needs to have a means to shut down banks in an or­derly way, with­out cre­at­ing a bur­den for tax­pay­ers. But Euro­pean lead­ers are still dis­cussing how this so-called res­o­lu­tion author­ity would work. As long as there is no such body, the ECB would be lim­ited in its abil­ity to deal with sick banks, the fund said.

The IMF also high­lighted dan­gers to the in­surance in­dus­try, which con­sti­tutes a large part of the Euro­pean fi­nan­cial sys­tem but has re­ceived far less at­ten­tion than banks. Years of slow growth and low in­ter­est rates have be­come a threat to life in­surance poli­cies or pen­sion plans that promised fixed re­turns.

"A weak eco­nomic en­vi­ron­ment, if it per­sists, can threaten the fi­nan­cial health of the life in­surance and the pen­sions in­dus­tries," IMF. said. A ver­sion of this ar­ti­cle ap­peared in print on March 16, 2013, on page B7 of the New York edi­tion with the head­line: Euro Zone Is Called Still Sus­cep­ti­ble to Shocks.

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