BANKS AROUND the world still have to reveal about half their likely losses resulting from the financial and economic crisis, the International Monetary Fund said yesterday, warning there was still a "significant" risk of another downward lurch in the global recession.

A failure to reveal the true scale of the losses they are likely to face and to boost capital held in the banks would undermine the economies of the US, the UK and the euro zone and could generate a renewed vicious spiral where weak banks damage economic prospects, raising default rates and further threatening the health of banks, the IMF said.

José Viñals, the fund's head of monetary and capital markets, said: "In order to provide the credit that the economic recovery will need, you need to have some muscle as a bank - that means having, among other things, sufficient capital. Banks need more capital - they need more capital in Europe; they need more capital in the US; they need more capital in other parts of the world in order to have enough strength to provide more lending."

But the IMF reduced its estimate of the ultimate losses in the financial system in 2007-10 to $3,400 billion (€2,300 billion) from $4,000 billion in its Global Financial Stability Report. Within banks, the fund estimates that losses will total $2,800 billion, of which they have so far recognised only $1,300 billion.

"US domiciled banks have recognised about 60 per cent of anticipated writedowns, while euro area and UK domiciled banks have recognised about 40 per cent," the report said.

Losses are likely to prove largest in the US and UK - where banks held more toxic assets and the downturn in commercial property has been greatest - but US banks have been quicker to recognise them than those in the euro zone or the UK. The fund said delays in recognising losses generally related to a failure to make provisions for bad loans.

Mr Viñals urged banks not to squander the chance to preserve capital by retaining profits and avoiding large dividends, as well as raising fresh capital from markets.

He said such restraint was especially important this year as banks' profits had been boosted by exceptionally low funding costs. "If in future you are going to have more capital and better capital, it is important that you start preparing for it now - so conserve capital and keep it inside the bank." - (Copyright The Financial Times Limited 2009)