By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE) – The International Monetary Fund (IMF) has endorsed a Single Supervisory Mechanism (SSM) for Euro Area Banking Union.
This is contained in an IMF Staff Discussion Note “A Banking Union for the Euro Area†released February 2013 and made available to www.investadvocateng.com.
In discussing what should the Banking Union look like?, the Note pointed out that a SSM without a common resolution and safety net framework will do little to break the vicious circle between Banks and Sovereigns and stabilise the euro area.
The IMF Report affirmed that in particular, lack of a credible resolution framework would hamper the effectiveness of the SSM, and impede timely decision making by leaving national authorities to deal with the fiscal consequences of others’ supervisory decisions.
Another suggestion on what should the Banking Union look like? Is Bank recapitalisation as well as resolution and deposit insurance mechanisms would lack credibility without the assurance of fiscal backstops and burden-sharing arrangements.
The IMF Staff Discussion Note said conversely, common safety nets and backstops without effective supervision and resolution would break sovereign-bank links, but risk distorting incentives, reinforcing tendencies for regulatory forbearance, and shifting losses to the euro-area level. Effective control must accompany, or precede risk or burden sharing.
The Note affirms that the challenge for European policymakers is to halt the crisis while ensuring that actions dovetail seamlessly into the future steady state.
“Progress is required on all elements, and the governance of the banking union must provide the right incentives and promote timely decision making, lest national interests prevail and effectiveness is compromised†the IMF Staff Discussion Note said.
Click here to download full Note on a Banking Union for the Euro Area
