Global Banks Tumble on Concerns About Growth, Sovereign Credit

European banks dropped to a two-year low and led a plunge in financial stocks around the world on growing fear about faltering growth and the creditworthiness of countries such as Ireland and Italy.

The 46-member Bloomberg Europe 500 Banks Index dropped 4.2 percent to its lowest since April 2009. The KBW Bank Index (BKX) of 24 U.S. financial stocks slid 5.3 percent in New York, the biggest percentage decline since July 2010.

“The biggest issue that the European banks have is that they are undercapitalized,” said Daniel Alpert, managing partner at Westwood Capital LLC, a New York-based investment bank. “While U.S. banks don’t have a tremendous exposure to the sovereign debt in Europe, the bottom-line issue is these banks in Europe are important parts of the worldwide financial system.”

The market reaction spilled over to the U.S., where Bank of America Corp. (BAC), the nation’s biggest lender by assets, fell 7.4 percent to $8.83, JPMorgan Chase & Co. (JPM), the second-biggest, tumbled 5 percent to $37.92 and Citigroup Inc., the third- biggest bank, fell 6.6 percent to $34.81. It was the biggest percentage drop in JPMorgan stock since January 2010.

European Central Bank President Jean-Claude Trichet today offered banks unlimited money for six months and extended existing liquidity measures in an effort to quell concern that southern European lenders might have trouble borrowing in the debt markets.

Reaction Time

“The ECB’s program is virtually useless, because it’s not big enough to stomach Italy or Spain,” said Ronny Rehn, a bank analyst at KBW Inc. in London. “Politicians need to get ahead of the curve and stop reacting to events when it is too late.”

Spanish and Italian banks have been struggling to borrow money for more than 30 days’ duration over the past two months, according to analysts at Morgan Stanley in London.

“The funding markets are drying up and short-term funding is getting shorter,” Rehn said.

Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, fell 10 percent after reporting a first-half loss and larger Irish bad-loan provisions. The U.K. government owns 41 percent of Lloyds. Italy’s two biggest banks -- UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP) -- fell 9.3 percent and 10 percent respectively after a speech by Prime Minister Silvio Berlusconi failed to ease market concerns about the country’s debt.

The Bloomberg European Banks index has slumped 11 percent in the last five trading days, with Intesa SanPaolo, Lloyds, and France’s Societe Generale (GLE) SA all shedding more than one-fifth of their stock market value.

Italy and Spain

European officials are trying to put a firewall around Italy and Spain on concern that they will have to follow Greece, Ireland and Portugal in seeking bailouts. The cost of insuring Italian debt surged to a record today, with credit-default swaps rising 18 basis points to 384, according to CMA in London.

In a speech yesterday, Italy’s Berlusconi said that financial markets aren’t estimating risk correctly and said that Italy is “up to the task” of tackling the debt crisis. Earlier today he said that he doesn’t think the current market turmoil will get worse.

“Berlusconi did one thing you aren’t supposed to do,” Alpert said. The 19th-century English economist “Walter Bagehot once said, ‘As soon as you start telling everyone your credit is good, you don’t have any.’”

The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 European banks and insurers rose 6 basis points to 205, according to JPMorgan, nearing the 210 basis-point record of March 2009.

U.S. Follows

Among U.S. lenders, Wells Fargo & Co., the biggest home lender, dropped 5.7 percent, the most since August 2009. The weakness in U.S. bank stocks “is a carry-over,” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. “It’s the disappointing and deteriorating global economy that unveils the massive debt problems.”

Bank of New York Mellon Corp. (BK), the world’s largest custody bank, said today it will start charging institutional clients a fee for “extraordinarily high” cash deposits to stem a flight of capital into the safety of bank deposits. Other banks that have experienced dramatic increases in their cash deposits may follow, saidGerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine, who said he’d never seen a bank charge for taking institutions’ deposits.

In other signs of investors’ aversion to risk, the yield on the two-year U.S. Treasury dropped to a record low and rates on Treasury bills fell to zero.

“Bank funding remains stressed for southern Europe and remains a key source of risk for bank earnings, ability to lend and a drag on economic recovery,” Morgan Stanley (MS) analyst Huw van Steenis said by telephone today. While the provision of six- month money is “at the margin helpful, it is not of sufficient term to really offer game-changing help to re-open term funding markets, which is the focal point of the stress.”

‘Could Have Done More’

Trichet said the ECB has also resumed bond purchases after it stopped buying the bonds of distressed euro-area governments 18 weeks ago. Citigroup analysts led by Giada Giani described the decision to re-open the program for Portuguese and Irish debt as “half-hearted” and liable to leave Italian and Spanish bonds “highly vulnerable to further market turbulence.”

“Trichet could have done more to calm the markets,” said Simon Maughan, head of sales and distribution at MF Global Ltd. in London. “The lack of political leadership and an unwillingness to take things seriously is hurting the market.”

U.S. banks are declining because European developments and uncertainty in Washington about government spending may tip the American economy into recession, said Marty Mosby, an analyst at Guggenheim Securities LLC, which manages more than $100 billion, including Bank of America shares.

“Given the things in Washington, are we really going to be able to address concerns this year?” said Mosby, who is based in Nashville, Tennessee. “You then add what’s happening in Europe -- if we are fragile, a downturn or financial crisis in Europe will spread over here and add more pressure.”

To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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