The International Monetary Fund called on Saturday for an EU-wide deposit insurance scheme and more coordinated regulation of the continent's banks to prevent contradictory national regulation from exacerbating its debt crisis.

Global markets have been rocked in recent weeks by fears the euro zone sovereign debt crunch could cause a pan-European banking crisis, prompting some European leaders to call for the joint recapitalization of the largest banks.

A common bank crisis management system, a supra-national resolution regime and common deposit insurance rules would help significantly stabilize the banking system, said Ajai Chopra, the deputy director of the IMF's European Department.

Steps taken and contemplated (so far) do not go far enough. Modest reforms are not sufficient in the current environment, Chopra said during a speech in Kenmare, a small town in southwestern Ireland. The crisis requires convincing sceptical markets that Europe can make bold and unified decisions.

IRELAND GETS A GRIP, BUT NOT OUT OF WOODS YET

Chopra is in Ireland for the country's latest quarterly review under its 85 billion euros EU-IMF bailout. The outcome of the review will be published late next week.

He said the Irish government had come to grips with its banking problems but that weakness in the domestic economy remained a concern. Unemployment is still very, very high ... until unemployment also starts to come down, we shouldn't start to pop the champagne, he said.

Ireland's unemployment rate is over 14 percent, compared to 4.6 percent in 2007 -- before a property bubble burst and the economy was brought to its knees.

To prevent weakness in Europe's peripheral countries morphing into a banking crisis, Brussels needs to up its game in terms of regulation, he said.

The IMF believes a deposit insurance scheme should be introduced in parallel to an increased harmonization of deposit insurance schemes in the member states to ensure sovereign problems don't trigger destabilizing bank runs, he said.

The scheme could be funded by a harmonized bank levy on selected bank liabilities or a financial activity tax, he said.

EU leaders should also introduce a binding bank crisis management and resolution regime to reduce the risks of problems at bank's that operate across the continent.

PAN-EUROPEAN BACKSTOP

A common pan-European backstop would help break the link from the balance sheet of banks to the balance sheets of the sovereign, Chopra said.

The European Banking Authority should be granted supervisory authority and potentially resolution authority for all banks with cross-border activities, he said.

The EU should then set capital requirements for its banks at a higher level than targets set to be implemented by the Basel Committee of global regulators' minimum bank capital level of 7 percent.

The rule is being phased in from the start of 2013 to the end of 2018.

European leaders are expected to unveil their plans to resolve the debt crisis, which has dragged on for over a year, at a summit on October 23.

In unusually direct language, finance ministers and central bankers of the Group of 20 major economies said on Saturday they expected the October 23 summit to decisively address the current challenges through a comprehensive plan.

(Editing by Carmel Crimmins and Mark Heinrich)

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