IMF warns on eurozone crisis impact on banks

"Should the periphery's debt crisis continue to propagate to core euro area economies, there could be significant disruption to global financial stability," the IMF said in a regular report on the world economy.

European banks are "heavily exposed" to countries facing rising borrowing costs and lenders should make efforts to increase their capital following holes revealed by recent "stress tests" on the sector, the IMF said.

"A concern is that capitalisation of euro area banks is relatively low, and they rely heavily on wholesale funding, which is prone to freezing during financial turmoil," the report said.

"Trouble in a few sovereigns could thus quickly spread across Europe. From there it could move to the United States -- by way of US institutional investors' holdings of European assets -- and to the rest of the world."

European Competition Commissioner Joaquin Almunia said in a speech on Tuesday that banks may need to be recapitalised as the crisis worsens. Brussels previously said it believed banks were adequately capitalised.

"Strengthening the financial system remains a major priority," the IMF said.

"Efforts to raise capital from private sources to fill the gaps identified during the recent stress tests should move ahead immediately and should be more ambitious than supervisors deemed necessary," it added.

The Washingon-based organisation also called for "speedy implementation" of a debt crisis rescue package for Greece that was agreed at a July summit but is being held up by infighting among eurozone states.

The package would expand the powers of a crisis fund, enabling it to buy bonds of distressed nations as well as support bank capitalisation.

Copyright AFP (Agence France-Presse), 2011