The International Monetary Fund has warned that the global financial system is more vulnerable now than at any time since the 2008 financial crisis.
Some European banks are particularly weak and �urgently need to bolster their capital levels�, the IMF said in its Global Financial Stability Report.
It said time is �running out to tackle vulnerabilities� that threaten the banking system and economic recovery. On Tuesday, the IMF cut economic growth forecasts for Europe, the US and Japan. The IMF�s twice-yearly stability report said the risks to banks and financial markets had grown.
Fearful that some governments could default and that the global economy may return to recession, banks may start conserving cash, cutting access to capital and increasing borrowing costs.
As intra-bank lending freezes, the weaker European firms will struggle.Europe should consider tapping its Financial Stability Facility � a fund set up to provide aid to indebted countries � to support their weakest banks, the IMF said.
�Some European banks urgently need to bolster their capital levels,� the report said.
�In current market conditions, however, this may not always be possible, so public backstops, first at the national level and ultimately through the European Financial Stability Facility should be used to provide capital to banks as needed.�
The Washington-based IMF estimates that the eurozone debt crisis has directly cost banks in the European Union 200bn euros ($273bn; �176bn) since the end of 2009.
The 187-member group is holding its annual meeting at the end of this week in Washington, bringing together finance ministers and central bankers from around the world.
The report also said: �Restoring confidence in the stability of the US housing market is the key to bolstering the prospects for US banks.� On Tuesday the IMF�s chief economist, Olivier Blanchard, said that �Europe must get its act together�, and he criticised its leaders for being �one step behind the action�.
The IMF also cut its growth forecasts for all the major European economies.
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