The International Monetary Fund (IMF) has reduced its estimate of global bank losses by $600 billion - but warned the new figure of $3.4 trillion could rise further due to high unemployment rates across the world pushing up loan losses.
Rising security values combined with a new way of calculating losses are to thank for the improvement on the original $4 trillion deficit calculated in April.
But the IMF says that around another $1.5 trillion worth of loan writedowns will hit banks by the end of 2010.
Along with the new calculation, the Global Financial Stability Report also stated that financial institutions continue to face three main challenges - strengthening earnings, rebuilding capital and weaning themselves off government support.
The IMF report also outlined the challenges facing the policymakers who are in charge of regulating the banks.
It said they need to ensure there is sufficient credit growth to support the fledgling economic recovery while also managing the risks that come from heavy borrowing from the public purse.
The IMF believes stronger action is needed to increase bank capital and earnings capacity so banks are more able to support lending.
Jose Vinals, head of the IMF's monetary and capital division, told Reuters: "We've come from being on the brink of a financial meltdown to a situation where stability has returned to the financial system."
He added that the next challenge is how to make the financial system that is now in place support the economic recovery.
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