European crisis forces health check for US banks

Three years after being at the epicenter of a crisis that brought the global economy to its knees, US financial houses want to make sure they are not on the frontline of a fresh crisis.

This time the threat comes from Europe not Wall Street.

The fear is that the value of deals with European banks and governments could be obliterated by a rash of bankruptcies or default on the other side of the Atlantic.

But this time the banks believe they are ready.

Richard Bove, an analyst at Rochdale Securities, said the risk for US banks was minimal.

Whether it is Bank of America, Morgan Stanley or the overall industry, he said, "these companies have more liquidity than they've had in decades and they have more capital."

"My theory is sovereign countries developments don't matter. What matters is big banks' failures," Bove told AFP.

"But no country is going to let that occur," he said, as evidenced by Belgium and France riding to the rescue of Franco-Belgian bank Dexia for the second time since 2008.

In the meantime, "the banks don't have to do anything -- unless the banks need capital, and they don't."

While President Barack Obama warns that economic spillovers from Europe hitting the already enfeebled US economy, some of his top lieutenants are expressing confidence that banks will not be the means by which that crisis is transmitted to the United States.

US Treasury Secretary Timothy Geithner on Thursday reassured lawmakers that the US financial system was in "a significantly stronger position" after recovering from the 2008-2009 financial crisis.

"US financial institutions, including our major banks and money market funds, have substantially reduced their exposure to the economies of Europe that are under the most pressure," he said at a House of Representatives hearing.

"Our direct financial exposure to those governments and their financial institutions is quite small, but Europe is so large and so closely integrated with the US and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand."

But despite the general optimism, the last few weeks have proven an abject lesson -- if one were needed -- that on the market, confidence is at least as important as reality.

US banks have seen the backs of investors, leaving some with market value below the value of their assets, despite experts say, sound health.

On Wall Street, the Standard & Poor's index of banking shares, down 19 percent over the past three months, stands at the lows of mid-2009, when the economy officially exited recession.

Shares in the five largest US banks, the most exposed to the European public debt crisis, have been hammered even more: -47 percent for Bank of America since July 5, -42 percent for Citigroup, - 37 percent for Morgan Stanley, -30 percent for Goldman Sachs, and -25 percent for JPMorgan Chase.

S&P analyst Erik Oja said US bank stocks were oversold, and pointed out that banks in general appeared poised to report positive quarterly earnings beginning next week.

Their current market unpopularity is "due to the eurozone crisis directly for the largest banks because they might have exposure to the European banks, and for the rest of the banks it's indirect: if the eurozone debt crisis spreads and causes a recession in the US that would come at a very bad time for US banks because they have not yet fully recovered from the financial crisis of 2008," Oja said.

Keith Horowitz, a Citigroup analyst, said the sell-off might in part be thanks to the fact that investors were in the dark about US banks' exposure.

"Data available to assess exposure has significant limitations," Horowitz said in a note published Tuesday.

The analyst said that a 17 percent drop in Morgan Stanley shares over the past two weeks was "partially driven by fears regarding potential risk to a French bank default."

The Bank for International Settlements "significantly overstates" Morgan Stanley's exposure to French banks at $28 billion as of June 30, he added.

Horowitz said the Wall Street investment bank's hedging operations and other guarantee actions should be taken into account, estimating Morgan Stanley's total risk to between $1.3 billion and $2.6 billion.

In a note published Monday, Wells Fargo analyst Matthew Burnell said there was "market over-reaction" regarding Morgan Stanley, pointing to the bank's "plausible" $2.0 billion exposure to France announced by the bank in July.

Citigroup underscored that the major US banks had reported in July nearly $50 billion in exposure to the eurozone countries in crisis, the so-called "PIIGS": Portugal, Italy, Ireland, Greece and Spain.

Bank of America had the biggest credit risk, at $15 billion, followed by JPMorgan Chase at $14 billion and Citigroup at $13.5 billion.

Exposure was significantly smaller for Wells Fargo, at $3.2 billion, Morgan Stanley at $2 billion and Goldman Sachs at $1.9 billion.

Copyright AFP (Agence France-Presse), 2011