March 3, 2021

Euro-Style Anxiety Spreads

Regulators, bank executives and others continued to play down the risks on Thursday, emphasizing that this would not be a repeat of the 2008 financial crisis. In Europe, political leaders have vowed to prevent a Lehman-like collapse of a major bank, while American firms are better insulated from potential shocks than they were three years ago.

But on Thursday, shares of some big Wall Street banks sank to levels nearly as low as that in the months after the downfall of Lehman Brothers. Among investors, anxiety has been intensifying over the soundness of European banks despite repeated efforts to contain the sovereign debt crisis. The latest fears flared up after an unspecified lender tapped an emergency borrowing program set up by the European Central Bank to ensure that firms had ample funds in dollars.

On Wednesday the bank, which officials would not identify, borrowed $500 million, considered a relatively modest sum in global finance. But the move was widely viewed as a sign that Europe’s financial problems were deepening, given that it was the first time a European bank had used the dollar pipeline since February.

Investors are also nervous that the world economy may tip back into a recession, putting new pressure on big American banks just as they appear to be finding their footing.

After a few fleeting days of relief, stress levels across the industry are once again rising. Credit-default swaps on major banks, which pay out in the event of a financial collapse, have again widened in the last few days. Borrowing costs are notching slightly higher. Tension on trading floors is palpable — especially for the usually relaxed month of August.

To be sure, fears are nowhere near the levels reached at the depths of the financial crisis. Still, even measures taken to stave off another crisis are feeding the panic.

Here in the United States, news reports of heightened regulatory scrutiny have further eroded confidence and caused investors to dump their bank shares.

In Europe, temporary bans on short-selling of financial stocks, imposed last week by regulators in France and several other European countries, provided only a bit of relief. Traders say the measures have caused them to place some negative bets on bank stocks in countries that did not impose such measures, like the United States and Britain.

“There’s a general climate of apprehension,” said Jean-Pierre Lambert, a senior bank analyst with Keefe, Bruyette Woods in London. “When you have doubts about names, it can turn into a vicious circle.”

On Thursday, Citigroup shares plunged 6.26 percent, to $27.98. Bank of America was down 6 percent, to $7.01. Morgan Stanley and Goldman Sachs shares sink 4.76 percent and 3.51 percent, respectively. Bank stocks are down about 30 percent since January, and have swung wildly over the last few weeks.

The pounding was even more pronounced in Europe, where talk about the short-term financing challenges of the banks swirled through the stock market. Shares in Dexia, a large Belgian bank, dropped 14 percent. Société Générale fell 12 percent. Two British giants, Royal Bank of Scotland and Barclays, each had sharp declines.

American regulators have stepped up scrutiny of both United States and European lenders over the summer, with officials holding more frequent conference calls with individual firms alongside their counterparts at other central banks, according to people briefed on the phone calls.

William C. Dudley, the president of the Federal Reserve Bank of New York, described the inquiries as routine bank supervision. “We’re always scrutinizing European banks, U.S. banks and foreign banks in terms of how they’re doing, capital, liquidity, credit quality — so this is standard operating procedure,” he said in remarks at a New Jersey business conference, according to The Star-Ledger of Newark.

For now, American banks appear to be sound, and are probably in better financial shape than they were on the eve of the 2008 crisis. But the fear is that the troubles brewing among European lenders could ripple across the Atlantic.

European banks have amassed vast holdings of government and corporate bonds from Italy and Spain, two countries whose debts have worried investors. Doubts about the stability of these European institutions, in turn, are generating concerns about American banks, which are among their biggest lenders and trading partners. That is prompting investors on both sides of the Atlantic to unload their shares while also ratcheting up bank borrowing costs.

The short-term credit markets, where European banks turn for billions of dollars in financing, have been under serious strain, although nowhere near the levels of three years ago. Most European banks can borrow dollars only overnight or as long as a week; banks elsewhere can take out loans for as long as several months or more.

“Currently many banks cannot access term-funding markets at reasonable rates,” Morgan Stanley analysts wrote in a report on European banks. “If these term-funding stresses continue well into the fall, the risks are rising that a lack of credit availability could dent domestic demand growth further.”

Still, several short-term credit traders and analysts said that suggested little has changed while the talk has been flying. A crucial barometer of bank stress — the rate banks charge each other to swap euro-denominated assets into dollars — is at roughly the same level it was a week ago.

“A lot of this concern around the European banks is overstated,” said Alex Roever, a short-term fixed income analyst at JPMorgan. “We are not looking at another 2009, although investors are obviously being cautious.”

Investors in bank stocks have been pummeled by the bad news. Weak data for the housing and job markets suggests loan growth will not pick up anytime soon. Consumer confidence has plunged to record lows, while big corporations are so nervous that analysts expect many to delay hiring and expansion plans.

On Thursday, Morgan Stanley economists warned that both the United States and Europe were “hovering dangerously close to a recession.”

The prospect of twin recessions is perhaps the biggest worry for analysts who follow large American banks. JPMorgan Chase had about $49 billion of loans and other commitments to customers in France, Italy, Spain and several peripheral countries, according to research from Barclays. Citigroup had about $44 billion, while Bank of America had about 20 billion.

“The banks’ loans and commitments to European customers appear manageable,” said Jason Goldberg, the Barclays analyst who did the analysis. “To the extent issues in Europe lead to a slowdown in global economic growth, the U.S. banks aren’t immune.”

Nelson D. Schwartz and Louise Story contributed reporting.

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