U.S. Banks Face Contagion Risk From Europe Debt

 

U.S. banks face a “serious risk” that their creditworthiness will deteriorate if Europe's debt crisis deepens and spreads beyond the five most-troubled nations, Fitch Ratings said. “Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen,” the New York-based rating company said yesterday in a statement. Even as U.S. banks have “manageable” exposure to stressed European markets, “further contagion poses a serious risk,” Fitch said, without explaining what it meant by contagion. The “exposures” of U.S. lenders to major European banks and the stressed nations of Greece, Ireland, Italy, Portugal and Spain, known as the GIIPS, are smaller than those to some of the continent's larger countries, Fitch said. The six biggest U.S. banks -- JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley -- had $50 billion in risk tied to the GIIPS on Sept. 30, Fitch said. So-called cross-border outstandings to France for all except Wells Fargo were $188 billion, including $114 billion to French banks. Risk to Britain and its banks was $225 billion and $51 billion, respectively. Europe's debt crisis has toppled four elected governments, with the last two, in Greece and Italy, falling last week. Italian bond yields remained at about 7 percent -- the threshold that led Greece, Portugal and Ireland to seek bailouts -- and shares of French banks, including BNP Paribas SA and Societe Generale SA, dropped amid concern they'll need more capital. Stocks Slump U.S. stocks slumped yesterday after the Fitch report was released. The Standard & Poor's 500 Index slid 1.7 percent and the 24-company KBW Bank Index fell 1.9 percent. U.S. stock declines continued today, with the S&P benchmark dropping 1.8 percent at 12:41 p.m. in New York. The Fitch report is a worst-case scenario and is “oddly out of step” with the rating firm's previous reports, analysts at HSBC Holdings Plc said today. U.S. banks may even benefit as investors shift money from Europe, HSBC said. Ratings on the U.S. banking industry are stable and take into account lenders' improved capital and liquidity position, Fitch said. The rating company's assumption is that “euro zone sovereign debt concerns will be dealt with in an orderly fashion” and that a disorderly restructuring of sovereign debt or the “forced exit” of a nation from the euro will not occur, according to the report.