The International Monetary Fund (IMF) has called on eurozone countries to move promptly toward completing their banking union agency in an attempt to shut or rescue troubled banks to pay massive debts hindering the region’s economy.
The IMF made the request on Wednesday in its Global Financial Stability Report, addressing structural faults in the world economy.
“Investors’ faith in euro-area bank balance sheets must be restored … and banking union completed,” the fund said in the report, adding, “Banks in euro-zone countries hit hardest by the debt crisis were forced to raise interest rates on risky loans to clients who had difficulty paying already, further worsening the chance they would get their money back.”
The report, released twice a year, warned, “Otherwise, the euro area risks entering a lengthy, chronic phase of low growth and balance sheet strains.”
In addition, the IMF urged the union to conduct rigorous bank tests and establish ahead of time who would fill any capital shortfalls to give the exercise more credibility.
However, Germany as eurozone’s most powerful economy is concerned with who would foot the bill of bank closures across the union as well as who would be entitled to make the decision over closing troubled banks.
Also, EU lawyers have expressed their concerns on how to set up a framework that would cut the link between indebted countries and their banks. The issue has raised a range of political and legal controversies, mainly about who would foot the bill.
The EU will take the first step toward establishing the banking union agency in 2014, when the European Central Bank (ECB) starts monitoring banks throughout the eurozone.