World banks still vulnerable: IMF

The global banking sector remains in rough financial shape, four years after the start of the worldwide credit crunch, the IMF said Wednesday.

The International Monetary Fund said many banks have too many risky loansand too little capital on their balance statements and risk a crash if interest rates rise and the global economy slows.

"Nearly four years after the start of the global crisis, confidence in the banking system has yet to be fully restored. Despite improvements to balance sheets, some banks particularly in Europe remain insufficiently capitalized, and subject to rising funding costs," the worldfinancial organization said in its global financial stability report.

Banks in the euro zonehave become hooked on short-term loans and central bank credit lines that have low interest rates for the time being, but could dry up or become precariously more expensive in the medium term.

"The result is that global banks face a wall of maturing debt, with $3.6 trillion due to mature over the next two years," the report says, warning that funding will be "scarce" to refinance these debt requirements and that it will be felt most acutely in Ireland and Germany.

Nearly a third of banks in the euro zone have a so-called Tier 1 capital ratio below eight per cent, which is considered a crucial safety threshold by international regulators, the report found.

The report coincided with hard-nosed negotiations in Portugal over how to bail out its steep debts, which threaten to infect the wider European economy. The country's political leaders met in Lisbon on Wednesday to hash out the terms of an expected $115-billion loan from other euro-zone states and the IMF, with Portugal hoping to avoid the kind of interest rates Ireland and Greece had to accede to for aid they received last year.

Canada sidesteps

Overall, global financial risks have subsided somewhat since last fall, the IMF report says, but a number of large countries are on a "worrisome upward path" of debt.

The reportsays Canada faces some risk because household debt remains high, though the country's government balance sheets are among the best in the industrialized world and the mortgage default rate remains low.

Canada's financial sector managed to avoid slipping into the economic mudof the late 2000seconomic crisisby not lending as much as other banks into risky real estate markets andbecause regulators demanded higher capital reservesfrom domestic institutions.

South of the border, the IMF report notes, the U.S. housing sector has 16 months of additional housing supply, or 6.3 million units that could be sold, a problem for American banks.

Excess supply has a tendency to depress home prices, already at 11-year lows, and give homeowners problems when they need to refinance their mortgages.

Too many mortgage failures could trigger another crisis of confidence forU.S. financial institutions.