The International Monetary Fund has called on EU governments to use the new bailout fund, the ESM, to recapitalize banks.
In the first ever Financial Sector Assessment report on the European Union, the IMF says measures must be pursued to separate bank and sovereign risk.
"Including by making the ESM operational expeditiously for bank recapitalizations," it says.
It says strong capital buffers will be important for banks to perform their lending role effectively, in order to stimulate growth and so safeguard financial stability.
The IMF says the way the crisis has been dealt with in Europe - by trying to deal with financial problems on a country by country basis - has been extremely costly. It says this experience underlines the need for a Europe wide approach.
It describes the decision at last weeks European Council to establish a single bank regulator as "a strong achievement". It says the decision needs to be followed up as soon as possible with a decision on European-level bank resolution and deposit guarantee schemes.
It says there is neither the political will nor the fiscal space for European governments to shoulder the cost of another banking crisis, and urges the establishment of a resolution mechanism, funded by the banking industry itself, to pay the cost of future bank bailouts.
Overall the IMF says significant progress has been made over the past year in laying the groundwork for strengthening the EU's financial sector.
It says implementation of policy decisions is now needed. It says the EU must now move quickly to fill in the details of the broad policy agreements, to avoid delays in reaching consensus on key issues.