In the text of a speech to a banking conference in London, the IMF's First Deputy Managing Director David Lipton said European policymakers needed to take advantage of the region's economic recovery.
"The time has come to make that policy arsenal (to tackle banking crises) real and effective, and to coordinate such policies across the European economy," he said.
Many banks show consistently low returns on assets and equity, a trend that may continue given the region's low interest rates and flat yield curves. That makes it harder to raise capital and renders banks more vulnerable to future problems, Lipton said.
The European Central Bank’s latest proposals for banks to set aside provisions up to certain levels can help create the right incentives to reduce the remaining bad loans on their books.
"But there is a serious need for industry consolidation and rationalisation, including weeding out non-viable banks and encouraging M&A."
"Ideally, this consolidation would include much of the cross-border variety," Lipton added. "But Europe’s banking markets have become if anything more confined to national borders over the past 10 years."
Progress on the EU's plan for a 'capital market union' was also moving slower than desired. But Britain's looming departure from the EU was likely to catalyse the process he said.
About one third of the EU’s market-based financing involves London-based banks, including U.S. institutions. Many of these banks are already moving significant chunks of their operations from Britain to another EU member.
On ways to cement the region's economic recovery, Lipton said countries needed more growth-friendly fiscal policy, with more investment in infrastructure, education, and research and development.
"Countries with fiscal space have more options, and those without it should work to rebuild buffers now — before monetary accommodation ends — to avoid sharper adjustments later."
He also repeated an IMF call for more mutualisation of risk in the euro zone.
"In that setting, mutual support makes the union stronger, it is positive-sum."
(Reporting by Marc Jones; editing by John Stonestreet)
By Marc Jones