IMF head: Europe must fix banks, become more unified

Lagarde calls for stronger crisis management tools, which requires risk-sharing across national boundaries

Restoring the health of European banks is critical to strengthening a global economy that is struggling to regain its footing and is at risk of losing ground, the head of the International Monetary Fund said on Friday.

Christine Lagarde, managing director of the IMF, said it is urgent that European leaders take direct stakes in banks, and in the longer term they need to complement monetary union with financial union. Unified bank supervision, a bank resolution authority and a single deposit insurance fund are the critical steps needed, she said.

Moves toward deeper fiscal integration should go hand-in-hand with these steps, Lagarde said in a speech prepared for delivery before a Leaders Dialogue in New York.

"Let me be clear: the heart of European bank repair lies in Europe. That means more Europe, not less," she said.

Five years since the start of the financial crisis, further action to reform the global financial system is still badly needed, which means strengthening crisis management tools and the overall architecture of the system, she said.

Lagarde pointed to a vicious circle of events that is weakening growth and must be broken: mounting financial tensions, followed by action by policymakers, only to see a renewal of tensions.

"Policymakers need to lay out a clear road map for how to finish the job - not just looking to the next five or 10 years, but looking to the next weeks and months ahead," Lagarde said.

While Europe is not alone in its need to complete financial regulatory and supervisory reforms, action there is a priority because of the interconnected nature of global finance, she said.

Lagarde urged the following series of steps and said they need to be done speedily:

* Stronger crisis management tools, which requires risk-sharing across national boundaries for banking by setting up a unified banking system;

* Deeper fiscal integration; options include common bonds or a debt redemption fund;

* Breaking the link between sovereign risk and financial risk through the ability to directly inject money into banks;

* Better financial architecture, better regulation and stronger supervision, not only for Europe but in other countries too, which includes bank levies and top-quality internal governance.