UPDATE 1-German banks watchdog warns crisis could worsen

By John O'Donnell

BONN, May 15 (Reuters) - German financial watchdog Bafin warned on Thursday that the global crisis or "tsunami" that crashed over the country's banks could worsen, dragging down the wider economy.

Germany has been one of the hardest hit by the international markets turmoil triggered by a collapse in risky U.S. home loans.

The country's banks had invested heavily in this kind of debt and the collapse sucked in many of those lenders and almost blew up two -- IKB (IKBG.DE: Quote, Profile, Research, Stock Buzz) and SachsenLB.

"We were on the edge of the precipice," Bafin president Jochen Sanio told journalists on Thursday, comparing the global credit crunch with a tsunami wave.

But the dark clouds, said the bank watchdog in its annual report, have not yet cleared. "There is the danger that the financial crisis gets worse still and hits the real economy stronger than expected."

Sanio once again called for banks to come clean about their problems to rebuild battered confidence.

"The crisis must be brought to an end," he said. "There must be trust in the markets. A financial system cannot work with half liquid markets. How do we get it? Disclosure. You have to show what you have."

The global turmoil has already forced two of Europe's biggest banks -- UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) and Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) -- to turn to shareholders for cash as well as toppling some of Wall Street's biggest names.