February 26, 2021

Banking Sector Punished Over European Debt

The clearest signs of the anxiety are in the stock market, where shares of American banks plunged again on Wednesday. Bank of America dropped almost 11 percent. Citigroup sank 10.5 percent. Goldman Sachs fell 10 percent, while Morgan Stanley was down 9.7 percent.

All told, bank stocks have fallen more than 30 percent since the beginning of the year — and have swung wildly up and down over the last week — as the weakening economy is expected to take a toll on business and reduce earnings.

But concerns about European banks are driving the latest wave of selling. Société Générale’s share price dropped 14.7 percent on Wednesday, the most of any European bank, as its chief executive “denied all rumors” that he said caused the stock to fall.

Other European giants were alsopounded. Shares of Intesa Sanpaolo of Italy fell nearly 14 percent. Crédit Agricole and AXA Financial of France dropped more than 10 percent apiece.

Financial institutions across the Continent have huge holdings of government and corporate bonds from Italy and Spain. Doubts about the financial health of European lenders are encouraging investors to unload their shares and driving up their borrowing costs.

Those banks, in turn, trade billions daily with their counterparts on Wall Street. They also rely on billions of dollars invested by American money market mutual funds to finance loans and other investments.

That has created a vicious circle, where fears about the soundness of European banks are feeding new concerns about the stability of American financial institutions.

“The European situation is back and isn’t going away,” said Alex Roever, the head of short-term fixed income at JPMorgan Chase. “It continues to keep pressure on the market.”

Only a few months ago, American banks looked as if they had finally found their footing. Loan losses were easing. Profits and bonuses were back. Even some of the new regulations had turned out to be not as draconian as many bankers once believed.

But there has been a steady drumbeat of dismal headlines in the last few weeks. First, weak data for the housing market and the broader economy suggested that banks would find it even harder to grow. Standard Poor’s downgrade of the United States government further rattled confidence, the lifeblood of the financial system.

Then, in a sign of how grim things had become, the Federal Reserve took the unprecedented step of pledging to keep interest rates near zero for the next two years. That may prevent the economy from slipping into another recession, but it will squeeze lending profits that make up the bulk of banks’ income.

And that comes as demand is already slowing for all kinds of loans and a wave of deal making has been shelved.

“Everyone is going to be lowering their estimates,” said David Ellison, the chief investment officer of two FBR mutual funds that invest in financial companies. “You are going to have lower loan growth and lower margins; we are in a new era.”

If that were not enough, there are lingering worries about the legal hangover from the housing bust. Bank of America, which faces potentially tens of billions of dollars in investor claims, held an unusual conference call on Wednesday to reassure shareholders it could cope with all settlements, among other concerns. Its shares fell to $6.77 on Wednesday, after reaching a postcrisis high of almost $20 in April 2010.

Now, as Europe’s fiscal troubles spread to core trading partners like France, there are renewed fears of contagion. The links between French and American institutions, after all, are orders of magnitude larger than they are between American banks and say, Greek, or even Spanish ones.

For example, according to the Bank for International Settlements, French banks owed American institutions more than $160 billion at the end of 2010.  Spanish banks owed less than $20 billion. And that’s not counting the billions of dollars that big American banks lend directly to overseas companies or any European government debt they hold as investments.

Nowhere is that nervousness greater than in the short-term financing markets, where European banks turn to American money funds each day for tens of billions of dollars in funding.

Article source: http://www.nytimes.com/2011/08/11/business/financial-stocks-plunge-in-us-as-anxiety-rises-over-european-bank-crisis.html?partner=rss&emc=rss

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