Banks still face risks, says ECB

The ECB last cut rates in May

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

It said there was "no room for complacency" and banks would have to write off billions more dollars of bad debts in the next 18 months.

These could amount to a further $283bn by the end of 2010, it said.

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

State aid

"There is little evidence to suggest that the pace of write-downs has abated," the bank said.

"Further strains on profits cannot be excluded, as pressures on income remain high," it added.

The ECB forecast that write-offs, including those already made by banks, could total $649bn by the end of 2010.

Governments across the world have stepped in to bail out financial institutions, or to provide loan guarantees. In fact a number of banks are now part-owned by governments.

But some commercial banks have been reluctant to take state aid in order to maintain their independence.

The ECB's vice president Lucas Papademos urged banks to take advantage of government aid programmes.

"I think they should take more [money]," he said.

Many analysts believe that a turnaround in the banking sector is the key to driving economic growth.