WASHINGTON -- The head of the International Monetary Fund says banks remain saddled with too many toxic securities and have not yet shown an understanding of the need to embrace far-reaching operational reforms.

Dominique Strauss-Kahn, the IMF's managing director, sketched a nuanced view of a slowly healing world economy still beset by serious weaknesses. The global economy looks set for a period of sluggish growth and still-rising unemployment, he said. But perhaps the greatest risk remains the condition of the banking industry.

"All around the world, you still have a lot of undisclosed losses," Strauss-Kahn told a handful of journalists at the global lending body's headquarters.

Strauss-Kahn said the risk of another major financial institution failing over the next two years is "very small." But he added that bad loans must be disposed of before banks can play their customary role in financing economic growth. "You never recover until the cleansing of the banks' balance sheet has been done, and now we're not at the point where this has been totally done," he said, citing an IMF study earlier this year of 122 banking crises.

Preparing for this weekend's meeting of G-20 finance ministers in Scotland, Strauss-Kahn said politicians appear to be outpacing bankers in their response to the financial crisis. "I'm rather pessimistic from this point of view," he said. "Politicians seem to have drawn the lesson that they need to change the way they're working if they want to manage the global economy ... and the banking sector -- very little lessons have been drawn in terms of behavior."

Even as the current crisis still simmers, analysts have begun warning of potential new financial bubbles in debt, currencies and emerging-market capital flows. To cover the inevitable costs of future financial rescues and bailouts, the 186-nation IMF is mulling creation of an "insurance fund" that major institutions would pay into.

Strauss-Kahn, 60, who first raised the idea last month in Istanbul at the fund's annual meeting, said, "We have a sector with different kinds of risks from other sectors in the economy. The idea of trying to establish a kind of insurance makes sense, and we're working on that." (c) Copyright 2009 USA TODAY, a division of Gannett Co. Inc.

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