WASHINGTON (AP) — The International Monetary Fund said Wednesday that European banks are under pressure to preserve capital and could cut back sharply on lending over the next two years, slowing the region's growth.

The decline in credit is a big reason Europe's economy is expected to suffer a mild recession this year and barely grow in 2013, the IMF said in a report on the global financial system released Wednesday.

Large banks based in the European Union may reduce their balance sheets — which include outstanding loans, securities and other assets — by as much as $2.6 trillion through the end of 2013, the IMF said. That's about 7 percent of their total assets.

About one-quarter of that reduction will come from reduced lending and could shrink lending by 1.7 percent.

Some reduction in credit, or "deleveraging," is necessary, the IMF said. Banks aren't able to borrow as freely as in the past and governments are requiring them to hold more capital.

"But like Goldilocks, the amount, the pace of deleveraging must be just right," said Jose Vinals, the IMF's financial counselor. "Not too large or too much."

European leaders have taken many positive steps to shore up their financial system, the IMF said. The European Central Bank has provided roughly $1 trillion in loans to European banks since December.

The IMF notes that the central bank's capital has given European officials more time to push the continent's shaky banks to raise new capital. The EU's European Banking Authority is already pressing to do that. It has pushed banks to increase the size of their financial reserves compared to their risky loans and investments — but it has urged them to do it by finding new capital, not by cutting back on loans.

Even so, the IMF points out that most responsibility for overseeing banks remains at the national level, where authorities have been slower to make banks take tough measures.

Raising capital can be a difficult step because it can dilute shareholders holdings. The IMF also warned that national regulators must restrain banks from using money for payouts of dividends to shareholders and bonuses to top bank executives.