The International Monetary Fund (IMF) has urged European banks to be subjected to so-called stress tests to help restore confidence in the banking system.
The global monetary body is calling for the European governments to follow the lead of the United States and Britain to make their banks take stress tests, or risk assessments, and force them to come clean about their losses.
The measures taken to counteract the deep recession in Europe have provided a good foundation for a gradual recovery, but further actions by policy makers, particularly in the financial sector, are needed to restore market trust and confidence, and accelerate the recovery,” said Marek Belka, Director of the IMF’s European Department.
Praise was given on action already taken to counteract the deep recession in Europe, including recapitalization of viable banks, but the IMF lamented the lack of coordination between member countries.
“Europe is the most economically integrated market economy in the world, and yet the policies to address the crisis have been undertaken at the national level,” Belka said.
The United States has just concluded its own stress testing on 19 institutions, showing that 10 of them will need more capital to remain solvent. European countries have also conducted their own stress tests, though they are done on a national basis, and results are not disclosed publically, nor are banks balance sheets examined.
“The assessment of specific institutions' needs for recapitalization remains a responsibility of national authorities,” The Committee of European Banking Supervisors said on Tuesday.
The urge for coordination comes on the heels of an earlier IMF forecast predicting a 4 percent contraction for advanced European economies, and and 4.9 percent contraction of emerging European economies.
With low inflation, consumers could regain confidence earlier, but continued weak global demand could lengthen and deepen the recession, it warned.
“Without a well-coordinated effort in these areas, neither fiscal nor monetary policy efforts will work as effectively as they must,” Belka said.