"European Union: Financial Sector Assessment," Preliminary Conclusions by the IMF Staff
Press Release No. 12/500
Dec 20, 2012
A Financial Sector Assessment Program (FSAP) team led by the Monetary
and Capital Markets Department of the International Monetary Fund (IMF)
visited the European Union (EU) during November 27–December 13, 2012,
to conduct a first-ever overall EU-wide assessment of the soundness and
stability of the EU’s financial sector (EU FSAP). The EU FSAP builds on
the 2011 European Financial Stability Exercise (EFFE) and on recent national FSAPs in EU member states.
The mission arrived at the following preliminary conclusions, which
are subject to review and consultation with European institutions and
The EU is facing great challenges, with continuing banking and sovereign debt crises in some parts of the Union.
Significant progress has been made in recent months in laying the
groundwork for strengthening the EU’s finacial sector. Implementation of
policy decisions is needed. Although the breadth of the necessary
agenda is significant, the details of the agreed frameworks need to be
put in place to avoid delays in reaching consensus on key issues.
The present conjuncture makes management of the situation particularly difficult.
The crisis reveals that handling financial system problems at the
national level has been costly, calling for a Europe-wide approach.
Interlinkages among the countries of the EU are particularly pronounced,
and the need to provide more certainty on the health of banks has led
to proposals for establishing a single supervisory mechanism (SSM)
associated with the European Central Bank (ECB), initially for the euro
area but potentially more widely in the EU.
The mission’s recommendations include the following:
Steps toward banking union
The December 13 EU Council agreement on the SSM is a strong
achievement. It needs to be followed up with a structure that has as few
gaps as possible, including with regard to the interaction of the SSM
with national authorities under the prospective harmonized resolution
and deposit guarantee arrangements. The SSM is only an initial step
toward an effective Banking Union—actions toward a single resolution
authority with common backstops, a deposit guarantee scheme, and a
single rulebook, will also be essential.
Reinvigorating the single financial market in Europe
Harmonization of the regulatory structure across Europe needs to be
expedited. EU institutions should accelerate passage of the Fourth
Capital Requirements Directive, the Capital Requirements Regulation, the
directives for harmonizing resolution and deposit insurance, as well as
the regulatory regime for insurance Solvency II at the latest by
mid–2013, thus enabling the issuance of single rulebooks for banking,
insurance, and securities. Moreover, the European Commission should
increase the resources and powers of the European Supervisory
Authorities as needed to successfully achieve those mandates, while also
enhancing their operational independence.
Improved and expanded stress testing
European stress testing needs to go beyond microprudential solvency,
and increasingly serve to identify other vulnerabilities, such as
liquidity risks and structural weaknesses. Confidence in the results of
stress tests can be enhanced by an asset quality review, harmonized
definitions of non-performing loans, and standardized loan
classification, while maintaining a high level of disclosure. Experience
suggests that the benefits of a bold approach outweigh the risks.
Splitting bank and sovereign risk
Measures must be pursued to separate bank and sovereign risk,
including by making the ESM operational expeditiously for bank
recapitalizations. Strong capital buffers will be important for the
banks to perform their intermediating role effectively, to stimulate
growth, and so safeguard financial stability.
Effective crisis management framework to minimize costs to taxpayers
Taxpayers’ potential liability following bank failures can be reduced
by resolution regimes that include statutory bail-in powers. A common
deposit insurance fund, preferably financed ex ante by levies on the
banking sector, could also reduce the cost to taxpayers, even if it
takes time to build up reserves. Granting preferential rights to
depositor guarantee schemes in the creditor hierarchy could also reduce
costs, particularly while guarantee funds are being built.
The European Commission and member states should assess the costs and
benefits of the various plans for structural measures aimed at reducing
banks’ complexity and potential taxpayer liability with a view towards
formulating a coordinated proposal. If adopted, it would be important to
ensure that such measures are complementary to the international reform
agenda, not cause distortions in the single market, and not lead to
Lastly, the mission would like to extend their thanks to European
institutions for close cooperation and assistance in completing this