U.S. Examines European Banks

Includes: DB, SCGLF, UNCFF
by: Market Blog

By David Berman

There is a lot weighing on stocks on Thursday, including terrible U.S. economic news that hints at an oncoming recession. But The Wall Street Journal also seems to have put investors on edge with its article on U.S. regulators looking into the health of the U.S. divisions of big European banks.

A year ago, the European debt crisis was confined to the economic peripheries of the region, but it has since made tentative moves into the considerably larger economies of Italy and Spain, rattling investor confidence in the global financial system. Now, there’s the threat of moving into the United States as well.

According to the Journal (subscription required), the Federal Reserve Bank of New York has been holding meetings with European banks that have large operations in the United States. The purpose: To gauge their vulnerability to financial pressures and avoid a repeat of the 2008 crisis that overwhelmed a number of financial firms.

From the Journal: “The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say.”

And: “Officials at the New York Fed ‘are very concerned’ about European banks facing funding difficulties in the U.S., said a senior executive at a major European bank who has participated in the talks.”

The article didn’t name which banks had been targeted for scrutiny, but pointed out that France’s Société Générale SA (OTCPK:SCGLF), Germany’s Deutsche Bank AG (NYSE:DB) and Italy’s UniCredit SpA (OTCPK:UNCFF) are among the biggest European operators in the United States and rely on borrowed funds.

Financials were among the hardest hit stocks within the Euro Stoxx 50 index on Thursday, tumbling 6.4 per cent. In particular, Société Générale fell 12.3 per cent. However, U.S. financials have also seen sharp declines, with Bank of America Corp. (NYSE:BAC) down 5.8 per cent and JPMorgan Chase & Co. (NYSE:JPM) down 4.3 per cent.

While many observers have noted that the balance sheets of financial firms are in far better shape today than they were in 2008, in part because of the very scrutiny that the Journal article reports, investors have shown a tendency in recent weeks to sell first and ask questions later when concerns about a financial crisis arise.

Disclosure: None