The IMF’s warning on the state of the European banking system is directed at countries on the periphery of the eurozone, and Italy in particular, writes Phillip Inman:

Total losses attributed to European banks in the last financial crash were around €1tn, so a repeat of the devastation caused in 2008 could be withstood by just calling on shareholders to sacrifice their equity.

If the crash cost more than €1tn, banks can call on the €8tn of debts to bondholders, which could be cancelled in part or in their entirety, freeing up cash from interest payments to safeguard depositors. This is a substantial extra buffer. No wonder officials in Brussels, European Central Bank head Mario Draghi and the UK’s regulator, the Bank of England, feel confident a taxpayer bailout will never again be required.

So it might seem odd that the International Monetary Fund has sounded a warning in its latest financial stability report about the parlous state of the European banking system...

But the IMF is not talking so much about the UK as Italy and other countries in the eurozone periphery. Italy has propped up a forlorn bunch of regional banks that have done little to tackle loans that will never be repaid. Zombie businesses that spend all their spare cash on interest payments, denying them the funds for investment, litter the Italian manufacturing sector, which remains vast...

It is estimated that bad loans in Italy account for more than a third of the €900bn total, which means that a €6bn rescue fund put forward by Rome is desperately inadequate.

So the IMF is less interested in the aggregate figures for European bank funding and more concerned about the weakest link, which experience tells us can set off a chain reaction, bringing good banks down with the bad. For that reason the IMF should be applauded.