BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Europe Risk Rising For BofA, Goldman, Morgan Stanley, Fitch Warns

This article is more than 10 years old.

The bigger Europe's crisis gets, the scarier the contagion risk for U.S. banks. Image via Wikipedia

MF Global’s failure was sparked in large part by worry over its sizable bets on European sovereign debt. Morgan Stanley saw its stock hammered last month just on the suggestion it could have considerable exposure to countries like Greece and Italy, and Jefferies took the unprecedented step of detailing its holdings of European debt down to the individual bond last week just to mollify a jittery market.

So the fact that Fitch Ratings issued a report Wednesday warning that there is a real threat to the U.S. banking system from Europe’s sovereign debt crisis -- albeit one of contagion rather than direct exposure-- comes as little surprise.

“Exposures to large European governments and banks  are sizable,” Fitch’s report says, noting current that “unless the eurozone debt crisis is resolved in a timely and orderly manner,” the stable ratings outlook for U.S. banks “will darken” from the agency’s base cast, which does not account for a disorderly debt restructuring or the departure of any countries from the euro.

Fitch notes that many of the bigger positions in European sovereigns held by U.S. banks are hedged, but warned that the undisclosed nature of such protection – the top five had some $22 billion in hedges  associated with stressed markets – could prove problematic. For instance, the value of hedges through credit default swaps (CDS) has been called into question because of a proposed 50% haircut on Greek debt that would not trigger the insurance. (See "Why 'Voluntary' Haircuts May Haunt Europe.")

The report includes net exposure to debt in stressed European countries as of Sept. 30 for six major U.S. banks: Bank of America ($13 billion), Citigroup ($16.3 billion), JPMorgan Chase ($15.1 billion), Wells Fargo ($3.1 billion), Goldman Sachs ($2.5 billion) and Morgan Stanley ($3.4 billion).

Those holdings admittedly include little in the way of sovereign debt, but the issue has already made its way beyond the government bond markets. Seth Setrakian, co-head of equities at First New York Securities, argues that tight lending is already stunting growth and will lead to a European recession. “A credit crunch hurts growth,” he says, “and will have a material impact on growth.”

The banks mentioned in Wednesday’s reports hit session lows in the last hour of trading. Morgan Stanley got the worst of it, falling 8%, while Bank of America and Goldman lost 4.2% apiece, Citi fell 4.1%, JPMorgan dipped 3.8% and Wells Fargo emerged relatively unscathed with a 1.4% decline.

To date, the European Central Bank has been reticent to step in as the lender of last resort for governments in Greece and Italy. If the worsening crisis abroad comes home to roost in U.S. banks, one can’t help but wonder if Federal Reserve Chairman Ben Bernanke would take the drastic step of doing what his fellow central bankers across the Atlantic have not.