US banks endangered by eurozone crisis: Fitch

WASHINGTON: US banks could be hit hard if the eurozone crisis expands further, a study by Fitch ratings agency said Wednesday.

US banks have been slashing their European risk for more than a year, selling off the sovereign bonds of weak countries and reeling in lending, Fitch said.

Nevertheless, they still have exposure to the larger European Union member countries and major banks -- especially in France -- that, even if hedged, could prove costly if confidence in the eurozone continues to erode, it said.

"US banks could be greatly affected if contagion continues to spread beyond the stressed European markets" of Greece, Ireland, Portugal and Spain, it said.

"Exposures to large European countries and banks are sizable. The ongoing economic and market effects are additional concerns," it said.

It pointed to the risks in France, where banks are being weakened by their own eurozone exposure and where the government is cutting spending to avoid a feared downgrade by credit raters.

Fitch said that the top five US banks had at the end of the second quarter this year $188 billion in exposure to France, $114 billion of it to French banks.

The banks' exposure to Britain was $225 billion, including $51 billion to banks.

"A large portion of this exposure is likely secured... subject to margin/collateral agreements, and/or hedged," Fitch said.

"Nevertheless, the exposure data show the susceptibility of banks to contagion risk and the interconnectivity of large global banks."

As an example of how hedges could go bad, it pointed to the recent 50 percent "haircut" banks agreed to take on their Greek debt, noting that because it was called "voluntary," their hedges against a Greek default, credit default swaps, were not activated and so would not cover the loss.

Fitch also said that the 10 largest US money market funds, as of September 30, had $89 billion in European bank exposure, mainly French, German and British banks.

For the moment, Fitch said its ratings outlook for US banks remained "stable."

"Nonetheless, the risks of a negative shock are rising and could alter this view, even for banks with little or no exposure to Europe.

"While it would appear that the eurozone debt crisis is largely a "big bank" issue, Fitch is of the view that the consequences could affect global economic growth and further weigh down the US economy."

Copyright AFP (Agence France-Presse), 2011