Europe’s debt crisis has increased the credit risk faced by European banks on loans to governments by €200 billion ($274 billion) since the beginning of 2010, the International Monetary Fund said Wednesday.
Credit risk refers to the potential losses banks face should borrowers default.
The IMF called for banks to add cash reserves to their balance sheets to reassure investors and support lending.
The European Central Bank last week announced it would collaborate with the central banks of Canada, the U.S., the U.K., Switzerland and Japan to lend money in three operations to European banks beginning in October.
That was after funding dried up for European banks in general, and French lenders in particular, amid concern Greece is headed for a default.
Also on Wednesday, Lloyd's of London told Dow Jones Newswires that it has pulled its deposits from some banks and has cut its exposure to some European government debt in order to protect itself from any financial crisis.
"Given the uncertainty around the euro zone, it's only natural that we would seek to reduce any potential downside risk. As a result, we're not holding government debt of any peripheral EU country and have sought to reduce our exposure to banks in these countries," Lloyd's Finance Director Luke Savage told the news service.
European banks have become less willing to lend to each other as worries about the risk of default by Greece or Italy grow.
Moody’s Investor Service cut the long-term credit ratings of French banks Credit Agricole and Société Générale by one notch this week, citing their exposure to Greece and their reliance on short-term funding.
'Capital buffers' needed
"A number of banks must raise capital to help ensure the confidence of their creditors and depositors," the IMF said in its regular Global Financial Stability report released Wednesday.
"Without additional capital buffers, problems in accessing funding are likely to create deleveraging pressures at banks, which will force them to cut credit to the real economy."
S&P cuts Italian banks
Standard & Poor's has downgraded seven Italian banks due to sovereign debt risk.
Just days ago, the agency downgraded Italy's credit rating, citing political weakness.
In a statement released Wednesday, Standard & Poor's said it was acting "in accordance with our criteria applicable to the relationship between the ratings on financial institutions and their related sovereign in the European Economic & Monetary Union."
It said it was "lowering our long-term ratings on seven Italian banks and assigning negative outlooks to the long-term ratings on these banks."
The Associated Press
The Washington-based lender of last resort to governments said the risks to the global banking sector have "risen sharply in recent months," as global growth slowed, financial markets in Europe were in turmoil and the credit rating of the United States was downgraded.
The report followed by one day the IMF's decision to cut its growth outlook for both Canada and the world this year, with a warning that the global economy is "in a dangerous place." Also yesterday, Bank of Canada governor Mark Carney called for world leaders to come up with a plan to ensure European banks are properly funded.
The IMF also took aim at the lack of political leadership in Europe, saying financial markets have "begun to question the ability of policy-makers to command broad political support for needed policy actions," such as spending cuts to bring deficits under control.
Concerns about government debt levels have spilled over into the region’s banking system, raising the cost of borrowing for many banks and reducing the value of their shares.
The U.S. credit downgrade, it said, has added to concerns about the sustainability of U.S. government debt which, if left unaddressed, could add to the risks faced by government borrowers globally.
It warned that low interest rates, while needed to stimulate growth, have pushed investment banks and hedge funds to borrow more money to invest in assets that may lose value in the event of a new financial crisis.