The European Central Bank warned Monday of risks still facing the banking sector despite unprecedented steps by officials and central banks to get credit flowing to recession-hit economies.
"There is no room for complacency because the risks for financial stability remain high, especially since the credit cycle has not yet reached a trough," the ECB said in its latest eurozone 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 ECB thought eurozone banks might have to take another 283 billion dollars (204 billion euros) in writedowns by the end of 2010, mainly to account for risky loans.
For the period from 2007 through 2010, the ECB estimate for potential writedowns, or decreased value of assets including risky mortgage-backed securities, "could amount to around 649 billion dollars," Papademos said.
He gave the figure in dollars to make international comparisons easier.
The International Monetary Fund has forecast the full amount could come to 900 billion euros.
The 16-nation eurozone 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
For the ECB, the main risks still facing the eurozone financial system include a further erosion of capital and renewed loss of confidence in major banks if the global downturn turns out to be deeper and more prolonged than expected.
Insurers could also face "significant balance sheet strains" and the prices of assets such as stocks and securities could decline further on volatile markets, it warned.
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.
Problems faced by eurozone banks have been blamed for tightening credit conditions that could create a so-called negative feedback loop, weakening companies which in turn do more harm to the banks' balance sheets.
Over the weekend, Britain's Telegraph newspaper quoted a top German industry group official as warning that a deepening credit crunch in Germany was threatening to slam the brakes on an economic recovery.
"The liquidity crunch is increasingly threatening the survival of companies as well as finance for new orders," Hans Heinrich Driftmann, the German Chamber of Commerce and Industry (DIHK) president, was quoted as saying.
"This is becoming a danger to possible recovery."