European banks are far behind those in the United States in clearing bad loans off their books, and are so highly leveraged that they may require additional capital injections of up to $1.2 trillion to restore them to long-term stability, according to a major International Monetary Fund report released today.

The report suggests that U.S. banks have already written about half the estimated $1.1 trillion worth of bad loans and toxic assets off their books. European banks have moved much slower, so far writing down less than 25 percent of the $1.4 billion worth of bad debts on their books.

Overall, the report said, the total amount of bad debt in the global financial system has now risen to $4.1 trillion -- the highest levels since the Great Depression. While the financial crisis originated largely with bad debts from the sub prime mortgage bubble in United States, the pool of bad assets has been augmented by a surge in troubled loans in Europe and Japan stemming from a string of corporate failures and depressed housing and commercial real estate markets.

The report suggests the financial crisis will take longer to run its course in Europe, and could ultimately prove more costly for Europeans to fix -- potentially meaning governments there may have to spend tens of billions more in bank bailouts. The delayed response, officials note, is tied to the fact that the crisis started in the United States, giving U.S. financial institutions more time to identify and deal with the scope of the problem.

Overall, the report indicates global lending may not fully recovery until 2011. While lending may have bounced back somewhat in recent months, the credit crunch continues to make it harder and more expensive for businesses around the world to obtain financing, the report said. The credit crunch has been particularly pronounced and worrying in the developing world.