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, June 8, according to Reuters.

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.