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ECB says European banks still vulnerable

Dec. 9, 2010 at 4:29 PM

FRANKFURT, Germany, Dec. 9 (UPI) -- The European Central Bank said Thursday banks in Europe remain vulnerable due to sovereign debt issues, but they are healthier than six months ago.

In a biannual report on Europe's banks, the ECB said, "The overall economic and financial situation is still fraught with risks for financial stability.

"The main source of concern stems from the interplay between sovereign debt problems and vulnerabilities in segments of the euro area banking sector," the central bank said.

Economic growth, however, "is expected to further strengthen its (the banking sector's) resilience and profitability in the period ahead," the ECB said.

Banks with significant exposure in Ireland are of primary concern in the European Union. Ireland last month accepted a $90 billion international bailout to help shore up its banks, which have suffered huge losses on soured loans.

The ECB said there were two parallel roads to ruin. The economy on the whole, under one of three possible scenarios, was subject to "pockets of vulnerability being revealed in euro area non-financial corporations' balance sheets, because of high leverage, low profitability and difficult financing conditions," the ECB said.

Coming back the other way, risks in the financial sector included "strains … because of heightened funding vulnerabilities and dampened profitability prospects."

Banks were also vulnerable to high exposure to commercial property markets, the ECB said.

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