Europe must take "decisive action" to tackle the 900 billion euros ($956 billion) worth of non-performing loans (NPLs) the banks have on their books, the director of the Monetary and Capital Markets Department at the International Monetary Fund told CNBC.
The IMF's Jose Vinals said Monday that while important things had been done in Europe, and the euro zone in particular, to shore up the banking sector – such as regulations requiring banks to have a certain amount of capital – more needed to be done to clear up the bad loans.
Non-performing loans are loans that are in or close to default.
"Important things have been done, such as the increasing of capital of the banks, but there are still about 900 billion euros on NPLs that still need to be decisively tackled."
NPLs have been particularly prevalent in banking systems in southern euro zone countries including Italy, Portugal, Spain and Greece. Following the European Central Bank's asset quality review of 130 euro zone banks in October 2014, it found the total NPLs held by banks examined came to 879.1 billion euros.
These NPLs damage the entire economy, Vinals said, and could hamper Europe's tentative economic recovery.
"They capture capital and lower the profitability of the banks so the capacity of the banks to provide credit to the economy is lower. Banks with higher NPLs tend to have less willingness and ability to provide loans but Europe needs banks that lend to the corporate or household sector to support the recovery."