IMF urges speed on EU banking union The IMF appears to endorse further monetary easing by central banks, such as the Bank of England Europe must move quickly towards completing its banking union with a credible common backstop or risk undermining its new single bank supervisor, the International Monetary Fund said on Wednesday. In a discussion paper setting out a path to overhaul the eurozone's financial sector governance, the IMF staff warn of the dangers of leaving the project half-finished, either through political compromises or a loss of momentum. Eurozone countries last year agreed the framework for the European Central Bank to become a common bank supervisor, in what was the biggest step towards financial integration since the creation of the single currency. However, there remains uncertainty over the pace and ambition of member states to put in place the other legs of a fully fledged banking union: a single authority to wind up banks, a common backstop during crises and a shared safety net for depositors. "All the elements above - an SSM [single supervisory mechanism], a single resolution with common backstops and common safety nets - are necessary for a successful banking union," said the IMF paper. Missing elements would result in an incoherent banking union and, at worst, an architecture that is inferior to the current national-based one. The IMF's vision for full banking union is a long-term project, which it suggests would require changes to EU treaties to allow mutualisation and establish a powerful central authority to close down banks. Given the urgency of financial problems afflicting the eurozone, the IMF supports a host of transitional measures, including direct recapitalisation of some ailing banks to ease pressure on the balance sheet of sovereigns. However, it warns that the risks from stalling are significant and calls on the eurozone to agree terms for dealing with the costs of bank failure and start injecting capital into struggling banks directly. To allow the supervision regime to function properly in the medium term, the IMF suggests that the eurozone within the next year agrees burden-sharing rules for failed banks - including terms for member states sharing costs of bailouts in extremis. "It is essential that the European Council commit to a firm timeline for implementing a single resolution mechanism, including burden-sharing arrangements," the IMF report says. Without these, there would be dangerous conflicts of interest when handling the collapse of banks. Conflicts over the distribution of losses could arise, as the fiscal consequences of co-ordinated supervision remain national. The incentives would be to shift the costs of resolution, delaying action and jeopardising the achievement of least-cost resolution," according to the paper. The European Commission is preparing a reform plan to create a pan-European authority with the power to wind up banks. But there are deep divisions over the pace of reform, the degree of centralisation and the inclusion of any cost-sharing arrangements. There are no plans for a common deposit guarantee scheme in the medium term. While recognising the practical difficulties of such big institutional upheaval, the IMF says the ultimate form of the banking union should be clear. The risks in transition would be mitigated with a "a clear and time-bound road map, demonstrating a shared understanding of the end point by all member states ... with strict deadlines." "Without common safety nets and backstops, the banking union would remain an incomplete and risky construct that fails to delink the funding costs of weak sovereigns from that of their banks," the paper said. It would also risk jeopardising the credibility of the ECB and the [single supervisor] by leaving the system vulnerable. The ECB faces a tough task ahead in discharging its new responsibilities as a bank supervisor, the paper warns, arguing the central bank must be properly resourced. The challenge of developing the requisite competence at the ECB and building credibility in supervision should not be underestimated. Some downsides to the ECB undertaking supervision are also identified, including the risk of "difficult trade-offs" emerging, such as when monetary policy decisions impact on bank solvency. To mitigate the risks, the IMF recommends transparency in the decisions taken by the ECB supervisory board.