I.M.F. Says Euro Zone Remains Vulnerable

In its first official assessment of the European Union financial system, the I.M.F. 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 I.M.F. 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 I.M.F. 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 I.M.F. 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 I.M.F. 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 I.M.F. 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 I.M.F. 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 E.C.B. would be limited in its ability to deal with sick banks, the fund said.

The I.M.F. 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,” the I.M.F. said.

Article source: http://www.nytimes.com/2013/03/16/business/global/imf-says-euro-zone-remains-vulnerable.html?partner=rss&emc=rss