November 29, 2023

In Germany, Little Appetite to Change Troubled Banks

Is it Italy, Spain or perhaps Greece? No. That description is of Germany’s banking sector.

While the country’s economy is often held up as a model, German banks are among Europe’s most troubled. They required a bailout bigger than the one American banks received, and many are still struggling to recover.

But there is remarkably little discussion about fundamentally changing the structure of the German banking system. On the contrary, Europe’s economic leaders criticize Germany for slowing progress toward unifying the Continent’s patchwork system of bank regulation, an effort seen as crucial to restoring faith in the euro zone and averting future globe-threatening crises. Ailing German banks are also a dead weight on the euro zone economy as it struggles to crawl out of recession.

“Germany was actually hit very hard by the financial crisis,” said Jörg Rocholl, president of the European School of Management and Technology, a business school in Berlin. But the debate about the future of banking in Germany is “alarmingly nonintense,” Mr. Rocholl said.

Banks in Germany invested in seemingly every bad asset that came their way, including American subprime assets and Greek bonds. “There is no sense of pride that Germans were especially thorough or prudent,” said Sven Giegold, a German who is a member of the Economic and Monetary Affairs Committee in the European Parliament.

Some 646 billion euros, or about $860 billion, was spent or set aside to rescue German banks from 2008 through September 2012, according to European Commission figures. That is the second-highest bailout in Europe after Britain and more than the $700 billion authorized for the Troubled Asset Relief Program in the United States, of which $428 billion has been spent, according to the Congressional Budget Office.

In one recent example of German banking dysfunction, German authorities indicted Bernie Ecclestone, the chief executive of the Formula One auto racing series, in connection with a $44 million bribe said to have been paid to the former chief risk officer of BayernLB, a so-called landesbank owned jointly by the state of Bavaria and community savings banks.

Mr. Ecclestone, accused of making the payoff in 2006 so that the bank would sell its stake in Formula One to his favored buyer, has said he did nothing illegal.

The landesbanks, typically owned by state governments and local institutions, have a long history of corruption and mismanagement. BayernLB already required a 10 billion euro bailout from state taxpayers, and several other of its former top managers were under investigation for insider trading. Six former top managers of HSH Nordbank, a landesbank in Hamburg, are on trial for charges that include fraud and illegally concealing the bank’s true financial state, including losses on loans to the depressed shipping industry.

“Germany’s banking industry has improved its capitalization significantly and is now better off than before the crisis,” said Christopher Pleister, chairman of the German Financial Market Stabilization Agency. He said Germany’s bank restructuring law included strong protections for taxpayers and rigorous oversight. Mr. Pleister said it should be the model for the rest of Europe.

Yet there is little appetite for change in Germany because the banking system is so deeply intertwined with its politics, serving as a rich source of patronage and financing for local projects.

The landesbanks and the country’s roughly 400 local savings banks, known as sparkassen, are controlled by state and municipal politicians. All told, about 45 percent of the German banking industry is in government hands. That is not counting a 25 percent stake in Commerzbank, the country’s second-largest commercial bank, acquired by the federal government in the course of a bailout.

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High & Low Finance: Grumbles Follow Plan to Raise Bank Capital

One result is that the American banks appear to have a competitive advantage. Being relatively well capitalized, they can afford to lend. That is less true in Europe.

Keep that fact in mind as the debate goes on about the new capital rules that United States regulators proposed this week for the largest American banks, the ones with more than $700 billion in assets. Some of those banks will need to have a lot more capital in a few years than they have now if the proposed rules are not watered down.

The banks were relatively restrained in their reactions this week, leaving it to trade groups to voice their complaints, which have a familiar ring to them.

“Ever-higher capital rules,” warned Robert S. Nichols, the president of the Financial Services Forum, which includes 19 large financial companies, “while a critically important element of safety and soundness, can become prohibitive and actually lead to reduced capability to lend to our nation’s families and businesses at a time when the economic recovery remains fragile.”

That there are bank capital rules at all stems from the issues a country faces when it provides deposit insurance. Depositors have no reason to care whether the bank is healthy, so a risky bank is not at a competitive disadvantage. The problem gets worse when those who buy bonds issued by banks conclude that their investments are effectively guaranteed by the government.

“Banks have creditors who are not worried about risks,” says Anat Admati, a Stanford finance professor and co-author of a book, “The Bankers’ New Clothes,” that calls for tougher capital rules. “If they were normal corporations, the creditors would not stand for it.”

It was never easy for regulators to determine how much capital was needed, but it became more difficult as financial innovations spread. That led to the 1988 adoption of model rules by a group of central banks and regulators that was based in Basel, Switzerland. That accord, later called Basel I, set up risk weightings for various types of assets, allowing for less capital for less risky assets. As the inadequacies of such a fixed system became clear, the regulators moved to one that allowed more fine-tuning, called Basel II. That allowed banks to use their own models — or credit ratings from Moody’s, Fitch and Standard Poor’s — to determine just how risky an asset was, and therefore how much capital was needed.

“Risk weighting is based on a very arcane, very complicated series of ratios and formulas that are immediately gamed and makes the system more fragile,” Thomas M. Hoenig, the vice chairman of the Federal Deposit Insurance Corporation, said this week after the F.D.I.C. voted to propose the new rules, along with other regulators. He said that the average risk weighting of bank assets fell, year after year, as the banks became better at coping with the rule.

Those risk-weighted assets form the basis of the capital figures banks cite. If a bank has 5 percent capital, it means capital equals 5 percent of the assets after risk adjustments. Until recently, government bonds from European countries were zero weighted, meaning that they did not count at all. Collateralized debt obligations — many of which turned out to be extremely risky — had only a 7 percent weighting, Mr. Hoenig said.

The result was that banks tended to load up on the highest-yielding assets with a given risk weighting. Because many mortgage securities had AAA ratings, that led banks as far away as Germany to lose a lot of money when the subprime mortgage market in the United States collapsed.

Under the latest, post-crisis rules — Basel III — there is supposed to be a leverage test as a supplemental measure. That measurement counts capital as a percentage of all assets — Treasury bills or junk bonds. The United States has long had such a test, though it was relatively lenient, but many other countries did not.

Floyd Norris comments on finance and the economy at

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High & Low Finance: New Rules Will Give a Truer Picture of Banks’ Size

But it is not.

Under American accounting rules, banks that trade a lot of derivatives can keep literally trillions of dollars in assets and liabilities off their balance sheets. Since 2009, they have at least been required to make disclosures about how large those amounts are, but the disclosures leave out some things and — amazingly enough — in some cases do not seem to add up.

The international accounting rules are different. They also allow some assets to vanish, but not nearly as many. As a result, it is virtually impossible to confidently declare how a particular European bank compares in size with an American bank.

Much of that will change when first-quarter financial statements start coming off the printing presses in a few weeks. For the first time, European and American banks are supposed to have comparable disclosures regarding assets. Their balance sheets will still be radically different, but for those who care, the comparison will be possible.

This comes to mind because these days it seems that big banks do not much want to be thought of that way. A rather angry argument has broken out regarding whether “too big to fail” institutions get what amounts to a subsidy from investor confidence that no matter what else happens, they would not be allowed to fail. The banks deny it all. Subsidy? Penalty is more like it, they say.

We’ll get back to that argument in a moment. But first, there is some evidence that the big American banks may have scaled back their derivatives positions last year. At five of six major financial institutions, the amount of assets kept off the balance sheet appears to be lower at the end of 2012 than it was a year earlier.

Still, the numbers are big. JPMorgan Chase, the biggest American institution, had $2.4 trillion in assets on its balance sheet at the end of 2012. But it has derivatives with a market value of an additional $1.5 trillion that it does not show on its balance sheet, down from $1.7 trillion a year earlier.

So is JPMorgan getting bigger? Measured by assets on the balance sheet, the answer is yes. That total was up $93 billion from 2011. But after adjusting for the hidden assets, the bank appears to have shrunk by $109 billion last year. If the bank used international accounting rules, it appears it would be getting smaller.

Not having those assets on the balance sheet makes the bank look less leveraged than it might otherwise appear to be. If you simply compare the book value of the bank with its assets, it appears it has $11.56 in assets for every dollar in equity. Add in those derivatives, and the figure leaps to $18.95.

It is not as if those assets are not real, or that they are perfectly offset by liabilities also kept off the balance sheet. There is a similar amount of liabilities that are not shown, but there is no way to know just how they match up with the assets in terms of riskiness. The nature of derivatives makes it hard to assess aggregate totals.

If a bank has a $1 million loan to someone, that is an asset that would go on the balance sheet at $1 million. Presumably the worst that could happen is that the bank would lose the entire amount. But a large derivative position might currently have a market value of $1 million, and thus would be shown as being worth the same amount, whether on or off the balance sheet. But if the market moves sharply, the profit or loss could be many multiples of that figure.

Under American accounting rules, banks that deal in derivatives can net out most of their exposure by offsetting the assets against the liabilities. They do this based not on the nature of the asset or liability, but on the identity of the institution on the other side of the trade — the counterparty, in market lingo.

The logic of this has to do with what would happen in a bankruptcy. What are called “netting agreements” allow only the net value to be claimed in case of a failure. So the bank shows the sum of those net positions with each party.

Floyd Norris comments on

finance and the economy at

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Standard Chartered Bank Accused of Hiding About 60,000 Transactions With Iranians

The New York State Department of Financial Services accused the British bank, which it called a “rogue institution,” of hiding the transactions to gain hundreds of millions of dollars in fees from January 2001 through 2010.

Under United States law, transactions with Iranian banks are strictly monitored and subject to sanctions because of government concerns about the use of American banks to finance Iran’s nuclear programs and terrorist organizations.

The highest levels of management knew that Standard Chartered was deliberately falsifying records to allow billions of dollars in transactions to flood through the bank, according to the regulatory filing.

The bank “left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes,” the agency said in an order sent to the bank Monday. At the most extreme, the agency’s enforcement actions against the bank could include the revocation of its license to operate in New York.

Beyond the dealings with Iran, the department said it discovered evidence that Standard Chartered operated “similar schemes” to do business with other countries under United States sanctions, including Burma, Libya and Sudan.

During a nine-month investigation, the department, led by Benjamin M. Lawsky, said that it reviewed more than 30,000 bank documents, including internal e-mails. It investigated the bank because it had routed the transactions through its New York operations. Under the order, Standard Chartered will have to pay for an independent monitor to ensure its operations comply with state law.  

In an e-mailed statement, a spokesman for Standard Chartered said the bank was reviewing its “historical U.S. sanctions compliance and is discussing that review with U.S. enforcement agencies and regulators.” He added that the bank “cannot predict when this review and these discussions will be completed or what the outcome will be.”

The department contends that Standard Chartered systematically scrubbed any identifying information from the transactions for powerful Iranian institutions, including the Central Bank of Iran and Bank Saderat, that are legally subject to sanctions under United States law.

The department accused the bank of undermining the safety of New York’s financial system through a range of violations including “falsifying business records” and “obstructing governmental administration,” according to the order.

Suspecting that Iranian banks were using their financial institutions to finance its nuclear weapons program, the United States Treasury Department banned certain transactions between Iranian banks and United States financial institutions in 2008. The regulator said the bank engaged in so-called U-turn transactions, where a foreign institution routes money to an American bank, which then transfers the money immediately to a separate foreign institution.

 The accusations are the latest to strike British banks. In July, a United States Senate panel found that HSBC was used by Iranians looking to evade sanctions and by Mexican drug cartels to funnel money back into the United States.

Together, the allegations raise concerns that there is a broader pattern of illegal money freely flowing into the United States through international financial institutions.

 In the Standard Chartered investigation, the order said that the bank’s management created a formalized operating manual that showed staff members how to strip off any information from the transactions that might tie them to the sanctioned Iranian institution. The manual was called “Quality Operating Procedure Iranian Bank Processing.”

Under a strategy called Project Gazelle, which the regulator said was approved at the highest echelon of the bank, Standard Chartered falsified or omitted client identification in paperwork authorizing transactions, the order said. To drum up more revenue, the bank wanted to forge “new relationships with Iranian companies,” bank e-mails show.

The order says that executives at Standard Chartered sidelined concerns raised by its management in the United States. Concerned that the bank’s practices ran afoul of regulators and could lead to criminal liability, executives at Standard Chartered urged a thorough accounting of the bank’s Iranian business, according to an e-mail uncovered as part of the investigation.

Rather than quashing the program once concerns were raised, executives at Standard Chartered got better at shielding the wire transfers and other transactions, according to the order. What’s more, the regulator said Monday, the bank responded to calls for a review with outright hostility. A London executive of the bank was quoted in the document as having directed an expletive at Americans and adding, “Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”

By falsifying records and lying to regulators, the regulator said, Standard Chartered conducted a widespread conspiracy continuing for almost 10 years.

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Fed Proposes New Capital Rules for Banks

WASHINGTON (Reuters) — The Federal Reserve on Tuesday proposed new capital and liquidity rules for the largest American banks that would be rolled out in two phases and would probably not go further than international standards.

The plan issued closely follows statements the Fed has made in recent weeks to calm Wall Street concerns that United States standards might be more aggressive than those from other nations, putting American banks at a disadvantage.

The Fed said that both the capital and liquidity requirements in last year’s Dodd-Frank financial oversight law would be carried out in two phases.

The first phase would rely on policies already issued by the Fed, like the capital stress-test plan it released in November.

That stress-test plan will require American banks with more than $50 billion in assets to show they can meet a Tier 1 common risk-based capital ratio of 5 percent during a time of economic stress.

The second phase for both capital and liquidity would be based on the Fed’s adoption of the Basel III international bank regulatory agreement. That standard brings up the Tier 1 common risk-based capital ratio requirement to 7 percent, plus a surcharge of up to 2.5 percent for the most complex firms.

“They’re basically following the guidelines from Basel on the capital buffer,” said Gerard Cassidy, bank analyst at RBC Capital Markets. “There were really no big surprises.”

One area still unclear is how much the surcharge will be for banks that are above $50 billion in assets but are not designated as globally systemic.

“It looks like they are taking a pass on that,” said Joe Engelhard, a bank policy analyst at Capital Alpha Partners.

The KBW Bank Index of stocks was trading up 4.5 percent after the release of the Fed proposal, a slight gain over where it was beforehand.

The rules, once finalized, will apply to all banks with more than $50 billion in assets, including Goldman Sachs, JPMorgan Chase and Bank of America.

Most large United States banks already meet the Basel III requirements scheduled to go fully into effect in 2019.

The Fed is waiting on the Basel Committee on Banking Supervision to flesh out its own liquidity recommendations before setting out United States requirements, but the central bank said that initially it would hold American banks to a qualitative liquidity standard.

Under the Fed plan, banks would have to assess, at least once a month, what their liquidity needs would be for 30 days, for 90 days, and for a year, during a time when markets are under stress. They would be required to have enough liquid assets to cover 30 days of operations under these circumstances.

The proposals released on Tuesday are aimed at ensuring that financial firms have enough capital and liquid assets on hand to weather a future financial crisis. During the 2007-9 crisis, taxpayers put up $700 billion to bail out the financial system, partly through capital injections into banks.

The rules will be out for public comment until March 31, 2012, giving Wall Street time to argue that being forced to keep so much cash on hand it will hurt lending and the economic recovery.

Executives, including JPMorgan’s chief executive, Jamie Dimon, have complained that regulators are littering the financial landscape with rules, without properly analyzing their economic impact.

A Fed official on Tuesday said the agency does not have an estimate on how much the capital and liquidity standards will affect United States gross domestic product.

But he said the net benefit to the financial system outweighs the cost to Wall Street and any short-term decrease in credit availability.

The rules proposed will not only apply to the largest American banks. They will also cover any financial firm the government identifies as being important to the functioning of financial markets and the economy.

The government has yet to decide which nonbanks, like insurance companies and hedge funds, meet this standard.

The Fed said that when such companies were designated it might “tailor” the rules, which were drafted mostly with banks in mind, to better fit that particular company or industry.

The law also requires the Fed to write tougher standards for foreign banks with operations in the United States. Fed officials said on Tuesday they would release those proposals soon, and that they would apply to about 100 firms.

The proposed rules also try to limit the dangers of big financial firms’ being heavily intertwined. They would limit the credit exposure of big banks to a single counterparty as a percentage of the firm’s regulatory capital.

The credit exposure between the largest of the big banks would be subject to an even tighter limit.

Further, the Fed proposal requires banks to bolster their capital if it appears they are heading into trouble, such as being overexposed to risky assets.

The rule outlines four phases of this “remediation” process that a bank or other large financial organization would go through if it hits certain triggers signaling weakness.

If a bank does not bounce back after following through on requirements such as a capital increase, the regulators could then restrict dividends, compensation, or even recommend that the institution be seized and liquidated.

The Fed did not provide details about how much of the remediation process would be made public.

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Banking Worries Send Stocks Lower in U.S.

Asian indexes were lower after the news of the death of the North Korean leader, Kim Jong-il, raised concerns about regional stability.

Trading on Wall Street had opened higher but then turned negative in late morning. Analysts said that market moves were expected to be exaggerated, with lighter volumes in a holiday week.

During the day, some focus shifted to European sovereign debt troubles as the president of the E.C.B., Mario Draghi, forecast a difficult year for banks. Comments by Mr. Draghi in The Financial Times that dimmed the prospect of large-scale government bond purchases by the central bank — as well as a report in The Wall Street Journal that the Federal Reserve would rebuff pressure from American banks and go along with international recommendations on capital levels for banks — also affected the markets, analysts said.

“That kind of set a little bit of a negative tone,” said Brad Sorensen, an analyst for the Schwab Center for Financial Research. “For financials, the higher capital requirements mean they have less money to make money with. In an already tough environment, it gets a little bit more difficult.”

He added, “Any time there is some uncertainty there, that kind of frightens the market a little bit.”

The Dow Jones industrial average closed off 100.13 points, or 0.8 percent, at 11,766.26. The Standard Poor’s 500-stock index was down 1.2 percent, and the Nasdaq composite index fell 1.3 percent.

Bank of America dropped to $4.99, a decline of more than 4 percent. Morgan Stanley was down 5.5 percent, to $14.16.

While Mr. Draghi warned of a difficult year for banks, credit crunches are already visible in some countries like Ireland, Vitor Constâncio, the vice president of the E.C.B., told reporters in Europe on Monday. Meanwhile, slower economic growth is likely to lead to an increase in bad loans, which will further weaken lenders.

Keith B. Hembre, the chief economist and chief investment strategist at Nuveen Asset Management, said it was difficult to tie the day’s market movements to what was going on in Europe but said there was “overarching concern in my view” considering that there had been strong demand for the E.C.B. funding program, suggesting that banks margins could be pinched.

“Just in terms of the market performance today it is a little similar to Friday, when you have a pop at the open and then lost ground,” Mr. Hembre said. “There is somewhat of a European influence in that. It is not like there is any real dominant news story.”

Stocks had a choppy day on most major European exchanges, falling early, then rebounding in midsession before ending mixed. The Euro Stoxx 50 closed slightly higher, or about a quarter of a point. The index in Paris, the CAC 40, was up less than 0.1 percent, while the German DAX was down 0.5 percent. The FTSE 100 index in London was down 0.4 percent.

United States bonds were down 4 basis points to 1.81 percent in yield. German government bonds, which along with the United States Treasuries are considered to be among the most secure investments in the world, were little changed, suggesting investors were calm after the shock of the Korean news wore off. They closed up 3 basis points to 1.875.

The dollar gained against other major currencies. The euro fell to $1.3017 from $1.3046 late Friday in New York.

In Asia, the Tokyo benchmark Nikkei 225 stock average fell 1.3 percent. The Sydney market index S.P./ASX 200 fell 2.4 percent. In Hong Kong, the Hang Seng index fell 1.2 percent and in Shanghai the composite index fell 0.3 percent.

David Jolly and Jack Ewing contributed reporting.

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Business Briefing | Company News: F.D.I.C. Closes Four Banks Burdened by Home Loans

Regulators on Friday closed two banks in Georgia and one each in Florida and Colorado, raising to 84 the number of American banks that have failed this year. The Federal Deposit Insurance Corporation seized the four banks. The largest by far was Community Banks of Colorado, based in Greenwood, Colo., with $1.38 billion in assets and $1.33 billion in deposits. Also shuttered were Community Capital Bank, in Jonesboro, Ga.; Decatur First Bank, in Decatur, Ga.; and Old Harbor Bank, in Clearwater, Fla. By this time last year, regulators had shuttered 139 banks.

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DealBook: Britain and European Union Agree on Regulating Derivatives Trades

Yves Logghe/Associated PressThe British chancellor of the Exchequer, George Osborne, departs after meeting with European Union finance ministers in Luxembourg on Tuesday.

7:29 p.m. | Updated

Britain struck a deal Tuesday with its European Union allies on how to regulate trading in over-the-counter derivatives, a compromise that the government said would improve regulation and protect financial markets across Europe.

At a meeting of finance ministers in Luxembourg, the British chancellor of the Exchequer, George Osborne, won a concession that would in most cases prevent the national regulator from being overruled on the authorization of trading by companies in over-the-counter derivatives in Britain.

An over-the-counter derivative is a financial instrument derived from another asset, like a stock or a bond, that is traded privately between parties rather than on an exchange. British officials say that London’s financial district handles around 75 percent of the European market for such derivatives.

In the United States, regulators, armed with the Dodd-Frank Act, have already moved to overhaul the over-the-counter market. American banks oppose many of the changes, saying the restrictions will force business overseas while foreign regulators lag behind with their own set of derivatives rules.

Mr. Osborne also secured a pledge that the European Commission would extend regulation to exchange-traded derivatives, which Germany dominates. Britain argued that the extended regulation was needed to establish a level playing field in Europe.

“We came here in a minority, somewhat outnumbered,” Mr. Osborne said. “Through some hard negotiation we very much improved the directive. We are going to have what we all wanted, which is more effective regulation of the derivative market.”

The European Commission argues that the new rules will provide vital transparency because trades will have to be registered and regulators will have access to that data.

The negotiations occurred amid growing tension between Britain and some European partners over financial services regulation. Britain fears that France and Germany want to ratchet up regulation to put London at a disadvantage as a financial center. Under European single-market rules, Britain could have been outvoted had it not struck an agreement.

The proposed changes, which will now be negotiated with the European Parliament, call for trades in over-the-counter derivatives in the 27 nations of the union to be reported to data centers. Regulators would have access to those data centers, while the newly created European Securities and Markets Authority, based in Paris, would have responsibility for the surveillance.

The European commissioner for financial services, Michel Barnier, welcomed the compromise on Tuesday, saying it would allow negotiations to proceed. In the past, Mr. Barnier has said that the lack of a regulatory framework for over-the-counter derivatives contributed to the financial crisis.

“No financial market can afford to remain a Wild West territory,” he has said.

The British government is also resisting plans, supported by Germany and France, for a financial transaction tax unless it can be agreed upon at a global level.

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Four European Nations to Curtail Short-Selling

The European Securities and Markets Authority, a body that coordinates the European Union’s market policies, said in a statement that these negative bets on stocks would be curtailed effective on Friday in France, Belgium, Italy and Spain. They are already banned in Greece and Turkey.

“Today some authorities have decided to impose or extend existing short-selling bans in their respective countries,” the authority said. “They have done so either to restrict the benefits that can be achieved from spreading false rumours or to achieve a regulatory level playing field, given the close inter-linkage between some E.U. markets.”

The statement said details for each country would be posted on their individual financial regulators’ Web sites.

European financial regulators have been discussing a continentwide a ban over the last few days amid fears from governments in places like France that these negative bets on stocks were driving a panic. In short-sales, a trader sells borrowed shares in hopes that they will decline in value before he has to buy them back to close out his loan. The difference in price is his profit, or loss.

But some countries, like Britain, came out publicly against a short-sale ban.

Critics say short-selling encourages speculation and pushes stock prices down, sometimes feeding on itself in a panicked market, while advocates say it keeps the market honest and maintains liquidity.

The increasing number of European governments banning short-selling puts United States regulators in a tricky position. Investors with negative views on bank stocks who are forced to close their negative bets in Europe might shift them to American banks. On Thursday, stocks in the United States continued their see-saw ride, surging 4 percent, buoyed by hopeful data on initial jobless claims.

The short-selling announcement in Europe stirred some immediate criticism. “It is a crisis of confidence, and when you do something like this, it shows a lack of confidence, which is exactly the opposite of what you want to say to the markets,” said Robert Sloan, managing partner of S3 Partners, a firm that helps hedge funds manage their relationships with their brokers.

Back in 2008, European and United States officials coordinated temporary bans on shorting financial stocks.

The bans in Europe are drawing to the list of comparisons that commentators are making between the current market unrest and the financial crisis of 2008.

Back then, governments around the world, including Britain and the United States, banned short-selling on financial stocks temporarily. The ban was meant to prevent bank stocks from falling further, but in time, stocks fell anyway.

Hedge funds, in particular, were hurt by the ban because it interfered with trading strategies that pair negative bets with positive ones.

The ban on short-selling in 2008 has been widely criticized and blamed for driving investors out of the market altogether, further hurting stock prices.

It is impossible to know whether the panic would have been worse without the ban, which protected companies like Goldman Sachs and Morgan Stanley, but general studies of short-selling have found that bans on that activity can lead to more volatility in the market and lower trading volume, according to Andrew W. Lo, a professor at the Massachusetts Institute of Technology.

Mr. Lo said banning short-selling also removed important information about what investors think about the financial health of companies, and suggested that the bans served mainly political purposes.

“It’s a bit like suggesting we take heart patients in the emergency room off of the heart monitor because you don’t want to make doctors and nurses anxious about the patient,” he said.

Details were still emerging about each country’s policy. In France, the market watchdog banned short-selling or increasing short-selling positions, effective immediately, for 15 days on 11 financial institutions. They are: April Group, Axa, BNP Paribas, CIC, CNP Assurances, Crédit Agricole, Euler Hermès, Natixis, Paris Ré, Scor, and Société Générale.

Shares in the banks have slumped sharply, sometimes on market rumors. Société Générale’s shares plunged as much as 23 percent Wednesday before closing down 14 percent, on what the chief executive, Patrick Oudea, called “fantasy rumors.” Its shares recovered slightly on Thursday, gaining 3.7 percent.

The European authority does not have the authority to impose a policy on short-selling but it can make recommendations and coordinate cooperation among the European Union’s 27 governments. The European Parliament is considering legislation to give the authority additional powers.

Some investors are already anticipating that such a ban may occur, Mr. Sloan of S3 Partners said. He said that for the past two months many investors had been getting out of their short positions, in part out of fear that such a ban might be introduced. He also said if there were more short-sellers in the market now, the markets might be falling less than they are. That is because as markets fall, short-sellers often close their positions to cash in profits and in doing so, they have to purchase shares to cash out.

The markets could use these sorts of buyers now, said Mr. Sloan, who wrote a book after the 2008 crisis called “Don’t Blame the Shorts: Why Short Sellers Are Always Blamed for Market Crashes and How History Is Repeating Itself.”

Arturo Bris, a professor of finance at the IMD business school in Lausanne, Switzerland, studied financial stock prices in 2008 before and after a short-selling policy was put in place. On Wednesday, Mr. Bris said that he did not think such a ban in Europe would help in the long run. “If there is a ban in the European markets in the next couple weeks it would stop the blood, but it’s not going to solve the problem,” Mr. Bris said. “It would just delay the problem.”

Even with the European countries’ bans on short-sales of some stocks, investors who have negative opinions on companies may still find ways to bet against them in the derivatives market, if those sorts of trades remain allowed.

Liz Alderman contributed reporting.

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The Agenda: Big Banks Shrinking as S.B.A. Lenders

The Agenda

How small-business issues are shaping politics and policy.

The Small Business Administration’s guaranteed business loan program is back. Nudged by stimulus provisions that reduced fees and increased guarantees, American banks made a record amount of S.B.A.-backed loans in 2010 (measured in dollars), reversing a demoralizing four-year slide. But there’s something noteworthy about who was doing that lending: while banks as a whole loaned more government-backed money than ever, the biggest banks loaned less.

The 25 American banks with the most deposits in 2010 underwrote $3.6 billion in S.B.A. general business, or 7(a), loans. That is just more than 20 percent of all 7(a) loans approved that year, down nearly a third from the share these same banks loaned in 2006. The decline cannot be tied to a decline in deposits. In that same period, these banks grew to control $5.8 trillion in deposits, 61 percent of all bank deposits in 2010.

In other words, in 2010 the 25 biggest banks held 32 percent more in deposits than those banks did in 2006 — but approved 30 percent less in S.B.A. loans.* The decline appears to be related to losses the banks suffered when borrowers defaulted on one type of 7(a) loan during the crisis, and perhaps as well to the difficulty large banks have in making profits on smaller loans in general.

Steve Smits, the S.B.A. associate administrator who supervises lending programs, said that one reason big banks lost 7(a) market share was that during the recession, many community banks joined — or rejoined after a long absence — the S.B.A. program as a way to keep lending despite their weakened balance sheets. This was possible because S.B.A. loans permit a bank to keep less cash in reserve and can be sold on a secondary market to generate still more cash for the bank. “We definitely saw north of a thousand lending partners use our programs for the first time in years during the depths of the recession, and many of those institutions were the small community banks,” Mr. Smits said.

But the big banks didn’t just lose share of total S.B.A. lending; their dollar volume fell absolutely as well — 15 percent from 2006. Bank of America, the largest bank and one of the top 7(a) lenders in 2006, saw its loan volume plummet 89 percent by 2010. Loans at PNC Bank and RBS Citizens (which operates as Citizens Bank in the Northeast and Charter One in the Midwest) fell by 82 and 83 percent, respectively. At Capital One, which had moved aggressively into the S.B.A. market only a few years earlier, 7(a) lending has almost completely collapsed: the bank, which approved $228 million worth of 7(a) loans in 2006, green-lighted only $551,000 in 2010.

The figures here (and in the chart below) represent loan amounts approved by either the bank or the S.B.A. — a higher amount than the money actually distributed to borrowers, since some loans are canceled before they are issued. They were compiled by the loan brokerage firm MultiFunding, using deposit data from the Federal Deposit Insurance Corporation and loan information from the S.B.A. (which was provided by Coleman Publishing). The loan figures are for calendar years, though the S.B.A. itself tracks its lending by the government’s fiscal year, which begins Oct. 1 and ends Sept. 30.

“I did expect to find that the big banks currently are making a lot less loans to small businesses than smaller banks are,” said Ami Kassar, who is chief executive of MultiFunding. “I didn’t expect to find that the big banks commitment had decreased.”

The big banks simply are not well suited to make S.B.A loans in particular, or small-business loans in general, said Barry Sloane, chairman and chief executive of Newtek Business Services, a large 7(a) lender that is not a bank. “The larger institutions have a much higher cost structure, and they have a harder time making a million-dollar loan profitable,” Mr. Sloane said. “Larger banks, when they lend, want to lend more money, to a larger borrower, and they want to secure a depository arrangement. S.B.A. loans don’t necessarily go along with a significant amount of deposits. And they are much more labor-intensive than a conventional loan.”

To induce large banks to make S.B.A. loans, the agency developed a 7(a) program especially for them, S.B.A. Express. This program lets lenders use their own application forms and credit-scoring models to make smaller loans, which they can approve themselves, and banks don’t have to take any more collateral than their regular loans require. It allows those banks to incorporate government-guaranteed loans seamlessly into their lending operations — borrowers who don’t qualify for a bank’s conventional loan can automatically be considered for an S.B.A.-backed loan without having to start the paperwork all over again. Because they take on more responsibility for underwriting the loan, the banks must also shoulder more of the risk, in the form of a lower guarantee.

By 2007, S.B.A. Express had grown into an important component of the 7(a) program, constituting almost a quarter of the loan volume and more than two-thirds of the total loan numbers. But big banks put the brakes on S.B.A. Express lending in late 2007, a year before the full-on credit crisis that saw most lending come to a halt. At the time, Mr. Smits’s predecessor at the S.B.A. explained that banks were seeing higher defaults than they originally anticipated, so they were raising their credit standards. Since then, many appear to have in fact pulled out of the program. Bank of America, RBS Citizens, and Capital One — the three banks showing the sharpest drop in S.B.A. lending — had all specialized in S.B.A. Express loans. Mr. Sloane and Tony Wilkinson, president of the National Association of Government Guaranteed Lenders, both attribute the decline in big-bank 7(a) lending to big losses in Express lending.

The S.B.A.’s Mr. Smits said he was not able to explain the decline in S.B.A. lending among big banks. “I think you have to look at each lender on its own and see whether they’ve actually had a drop in activities to small business lending in general, or whether it was just S.B.A. in specific,” he said. “You have to look at what their model is, and what their average loan sizes are.”

The banks contacted by The Agenda were for the most part reluctant to say much about their S.B.A. lending. All insisted that S.B.A. loans are just one of many ways they provide credit to small businesses and that they are broadly making more credit available to those companies.

Robb Hilson, an executive in Bank of America’s Global Commercial Banking division, was the most explicit. “Admittedly, we made mistakes, and we ended up losing a lot of money, even on the S.B.A.-guaranteed portfolio, because we were too aggressive at a time where it was not appropriate,” he said. “We were looking at borrowers who at the end of the day unfortunately in too many cases did not have the ability to repay the loan.”

Several years ago Bank of America suspended its traditional 7(a) program, with the higher guarantees and additional paperwork, because “we thought it wasn’t customer-friendly,” said Mr Hilson. Last year the bank reintroduced it, and Mr. Hilson vowed that the bank would rebuild — carefully — its Express program. And he added that Bank of America remained a leading lender in another popular S.B.A. program, which guarantees loans made by nonprofit community development companies that partner with banks.

In an e-mail, a PNC spokesman, Fred Solomon, attributed some of that institution’s lending decline in 2009 and 2010 to its efforts to combine with National City Bank, which PNC bought in 2008. But, he added, “other factors do play a role, including our determination not to rely on the S.B.A.’s guarantee when qualifying potential borrowers.” A spokesman for Capital One, Steve Schooff, said in an e-mail message, “We are reevaluating our strategy and opportunities in the current environment relative to S.B.A. loans to determine the best approach.”

Mr. Kassar, for his part, acknowledged the limitations of his analysis of which banks are supporting small businesses. “I don’t think the S.B.A. is the only indicator, or a perfect indicator,” he said. Still, he added, “it does seem like a reasonable indicator of Main Street lending.”

Not all of the big banks have struggled with S.B.A. lending. Despite the overall downward trend, several  actually made more 7(a) loans over this time period. SunTrust posted the biggest growth: through 2008, its 7(a) lending hovered around $34 million. In 2009, it grew to $44 million — and then soared to $155 million in 2010. SunTrust has gone from being purely an Express lender to an S.B.A. “generalist,” said Jeff Nager, a SunTrust senior vice president and its S.B.A. Division Executive. “We have made it a focus of the bank.”

Mr. Nager acknowledged that SunTrust’s S.B.A. lending effort was buoyed by the generous government incentives established by the 2009 Recovery Act. “It didn’t change our desire to play or not play, but it stimulated a lot of knowledge in the S.B.A.,” he said. “The borrowers and the clients learned a lot more about the S.B.A. in a short amount of time because of the stimulus. It became a more prevalent part of the discussion in the market place.”

The stimulus provisions have since expired, but Mr. Nager predicted further growth for S.B.A. lending at his institution.

*Eight of the top 25 deposit-holding banks did not participate in the 7(a) program at all between 2006 and 2010; these banks are chiefly credit card lenders or investment managers.

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