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IMF warns shaky European banks

The International Monetary Fund has singled out European banks as it insisted that more needs to be done to shore up the global financial system.

It said Europe's weak banks are "caught in a maelstrom" and must beef up their financial buffers.

The IMF said the weaker tier of Europe's banks are facing pressure on multiple fronts, from thin capital reserves - which help absorb losses in sudden downturns - and shaky investments still held on their balance sheets to unstable sources of financing.

The warning comes as European Union officials struggle to shore up confidence in government finances and banks. Greece and Ireland have already needed bailout loans to avoid defaulting on their debts, and Portugal has also asked for help from the EU bailout fund.

"Incomplete policy actions and inadequate reforms of the banking sector have left segments of the global banking system vulnerable to further shocks," the IMF report said. "Many institutions - particularly weaker European banks - are caught in a maelstrom of interlinked pressures that are intensifying risks for the system as a whole."

The EU banking regulator is trying to boost confidence in the continent's banks by putting 90 of them - the bulk of Europe's banking system - through stress tests that measure what would happen to their finances if the economy took a sudden downturn. A similar exercise last year was deemed easy, and passed Irish banks that later failed.

The purpose of the tests is to push banks that fail to ask investors to put up more capital and strengthen their finances, or else cut back risky loans and investment to levels that their capital buffer could handle. Results are expected in June.

The IMF report outlined other problems facing the world's financial system, such as too much household debt in the United States, and emerging economies' problems in handling new inflows of investment without overheating.

Policy makers globally have pushed banks to raise more capital and introduced new safeguards, the IMF said in its twice-yearly report on the stability of the global financial system, but said more needs to be done to guard against a new financial crisis. The Washington-based international organisation especially underlined the interlocking financial problems afflicting the 17 nations that share the 12-year-old euro currency.

The IMF said entire swathes of the European banking system are cut off from normal financial financing now, relying on short-term borrowing from the ECB and the repo market, a source of short-term credit that can dry up rapidly in times of trouble.

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