Banks are 'vulnerable to shock'
Weak European institutions must 'beef up' financial buffers, says IMF
The International Monetary Fund said weak European banks were "caught in a maelstrom" and must beef up their financial buffers, insisting more must be done to shore up the global financial system.
The IMF said the weaker tier of Europe's banks was 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 the European Union struggles to shore up confidence in government finances and banks. Greece and Ireland have already needed bail-out loans to avoid defaulting on their debts, and Portugal has also asked for help from the EU bail-out 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 US, 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 that 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.
Government and bank finances are closely related because European governments, especially Ireland, have incurred heavy expenses bailing out failed banks.
In turn, questions about European governments' big deficits and ability to pay them are undermining bank holdings of government bonds.