IMF believes that Europe needs banking union for euro zone

Banking union should eventually comprise single supervision, resolution, and safety nets

According to a new paper from International Monetary Fund staff, a successful banking union should eventually include three key elements: a single supervisory mechanism to oversee the rules and contain the buildup of risks; a single resolution authority to deal with weak or failing banks; and common safety nets to sustain depositor confidence in the event of shocks.

A banking union for the euro area would provide an integrated approach to oversee the safety and stability of the financial system as a whole.

Building a complete banking union will take time. Meanwhile, the challenge for European authorities is to stem the crisis, while ensuring that actions to address financial sector weaknesses dovetail seamlessly into a complete banking union in the future.

IMF staff noted it was encouraging that the European Commission will make a proposal for a single resolution mechanism this year, with agreement expected among European policymakers by mid 2014.