MercoPress. South Atlantic News Agency

ECB anticipates further write downs: 283 billion USD by end of 2010

The fragility of European banks was exposed by ECB officials

The European Central Bank (ECB) warned on Monday that the crisis facing the banking sector is not over, despite unprecedented government efforts to support banks.

high, especially since the credit cycle has not yet reached a trough“ the ECB said in its latest Euro zone Financial Stability Review. ”Policymakers and market participants will have to be especially alert in the period ahead“ it added.

ECB vice president Lucas Papademos told a press briefing the bank thought Euro zone banks might have to take another 283 billion dollars in write downs by the end of 2010, mainly to account for risky loans.

For the period from 2007 through 2010, the ECB estimate for potential write downs, or decreased value of assets including risky mortgage-backed securities, ”could amount to around 649 billion dollars“ Papademos said.

Risky loans made by financial institutions are seen by many analysts as a key reason for the downturn.

”There is little evidence to suggest that the pace of write-downs has abated. Further strains on profits cannot be excluded, as pressures on income remain high“.

The 16-nation Euro zone is in the midst of a recession which is the worst for some members since World War II. The ECB and governments have provided huge amounts of cash and credit to keep economic activity from grinding to a halt.

Papademos encouraged banks to take ”full advantage of the commitments“ by governments to support the financial sector with hundreds of billions of euros as it faced future challenges.

Asked if he considered it a threat to financial stability that banks had not signed on fully to government aid programmes, Papademous said: ”Yes, I think they should take more.“

Commercial banks, however, have been reluctant to tap available state aid and to lend freely to companies and households, with the resultant credit squeeze threatening to choke off a recovery.

German Chancellor Angela Merkel said Monday that German banks, among the most exposed to massive losses from the financial crisis, were in better shape than before.

”We are in a phase where the banks have left the intensive care unit,“ Merkel told a forum of business leaders in Berlin

Outside the financial system, the ECB identified a risk that US housing prices could fall further than anticipated and a possibility that the recession could become ”even more severe than currently expected.”

Finally, economic and financial stresses could intensify in central and eastern European countries, posing problems for the many western European banks that are exposed to problems in that region.