European bank stocks hurt by borrowing crunch

PARIS: European bank stocks tanked Thursday as fears mounted about their exposure to the region's debt crisis and weakening economy.

The stock prices of Britain's Barclays and France's Societe Generale led the way down, falling 11.5 percent and 12 percent, respectively. Germany's Commerzbank fell 10 percent.

Analysts said the plunge was partly a reaction to evidence that European banks are being forced to pay more for the short-term loans they need to finance day-to-day operations.

Some European banks with heavy exposure to the debts of Greece and other weak countries are relying on loans from the European Central Bank because other private banks are reluctant to do business with them. The ECB said one bank, which it didn't identify, had paid above-market rates to borrow $500 million a day for seven days.

No bank had requested such a loan for nearly six months. Analysts said fears about one bank's troubles are enough to spark concerns about the entire industry.

"These are worrying signs," said Neil MacKinnon, an economist at VTB Capital in London. "You could think of it as a mini-Lehman moment: There is the risk that a major eurozone bank might be a casualty."

In 2008, the investment bank Lehman Brothers collapsed, causing the global credit markets to freeze up. Banks refused to lend to each other because they feared more failures and greater losses. Companies and consumers couldn't get loans.

In a move that could compound fears about European banks' ability to borrow, U.S. regulators are stepping up scrutiny of the banks' U.S.-based subsidiaries, according to two people familiar with the situation. Banks are meeting more frequently than usual with supervisors from the Federal Reserve Bank of New York and the New York State Banking Department, said the people, who spoke on condition of anonymity to discuss confidential matters of bank supervision.

Analysts said that regulators are pressing the U.S. subsidiaries to keep more cash on hand, in case their European parent companies falter. Federal Reserve data show that foreign-based banks are storing more cash here in the U.S. - $127 billion near the beginning of August, up from $86.1 billion in June.

A similar spike occurred before the 2008 crisis, Keefe, Bruyette & Woods analyst Mark Pawlak said Thursday. He said the memory of that cash crunch is so fresh, it takes less to get investors worried. Fears tend to feed on themselves, causing more banks to hoard money instead of lending to each other.

"Any signs of a funding crisis brings back horrific memories," Pawlak said. "There's this visceral reaction."

Plunging stocks are not the only sign that investors are pulling back from European banks. They are also charging more to insure the banks' bonds against the risk of default, said Peter Tchir, a former trader who now runs the hedge fund TF Market Advisors.

Markets are responding ferociously to rumors in part because no one knows how much Greek government debt each bank holds. That leaves all of them vulnerable to speculation, such as about which bank borrowed $500 million from the ECB, Tchir said.

Fears of a potential default by Greece intensified on Thursday after at least five countries demanded that the Greek government set aside cash as collateral in exchange for their contributions to its bailout. On Tuesday, Finland struck a private deal requiring the Greek government to set money aside. By Thursday, four more countries were demanding similar terms.

As Greece sets aside more money as collateral, the government there has fewer options for digging out of its debt hole. The amount of cash needed to satisfy the five lender nations probably is not enough to scuttle the rescue entirely, but it could drive up the overall cost of the bailout.

It also reflects growing rifts between European nations about how to solve the debt crisis there. Until there is a long-term solution, analysts say, the pain for European banks will continue.

Poor economic news in the U.S. helped fuel the flight from bank shares in Europe and on Wall Street. Shares of big U.S. banks plunged faster than the broader market indexes. Bank of America Corp. and Citigroup Inc. closed more than 6 percent lower. Morgan Stanley and Wells Fargo slid more than 4.5 percent. The Dow Jones industrial average closed 4.3 percent lower.

"People are putting the pieces together," said Will Hedden, a sales trader with IG Index.

Banks have also been under pressure because German Chancellor Angela Merkel and French President Nicolas Sarkozy said earlier this week that their countries were developing a plan to tax financial transactions. That would cut into banks' profits, analysts said. - AP