US 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 eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the US banking industry could worsen,” the New York-based rating company said on Wednesday in a statement.
Even as US 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 US lenders to major European banks and the stressed nations of Greece, Ireland, Italy, Portugal and Spain (GIIPS), are smaller than those to some of the continent’s larger countries, Fitch said.
The six biggest US banks — JPMorgan Chase & Co, Bank of America Merrill Lynch Corp, Citigroup Inc, Wells Fargo & Co, Goldman Sachs Group Inc and Morgan Stanley — had US$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 US$188 billion, including US$114 billion to French banks. Risk to Britain and its banks was US$225 billion and US$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 would need more capital.
US stocks slumped after the Fitch report. The Standard & Poor’s 500 Index slid 1.7 percent and the 24-company KBW Bank Index declined 1.9 percent.
Investor demand for the relative safety of Treasuries during the European debt crisis has sent the difference between US short-term yields and bank rates surging to levels not seen in more than two years.
The gap between the London interbank offered rate and the overnight index swap, or what traders expect the US Federal Reserve’s benchmark to be over the term of the contract, widened to 38 basis points today. It was the highest level since June 2009.
US five-year swap spreads climbed to 45 basis points, the most since August 2009. Investors use swaps to exchange fixed and floating interest rates. The spread, the gap between the fixed component and the yield on similar--maturity Treasuries, is a measure of bank creditworthiness.
The TED spread, the difference between what lenders and the US government pay to borrow for three months, widened to 47 basis points today, or 0.47 percentage points, the most since June last year.
Yields have yet to reach the levels seen three years ago when credit markets froze and the US economy was in a recession. The TED spread was as wide as 4.64 percentage points in October 2008.
While US banks have hedged some of their risk with credit--default swaps, those may not be effective if voluntary debt forgiveness becomes “more prevalent” and the insurance provisions of the instruments are not triggered, Fitch said in the report. The top five US banks had US$22 billion in hedges tied to stressed markets, Fitch said.
Disclosure practices also make it difficult to gauge US banks’ risk, Fitch said. Firms including Goldman Sachs and JPMorgan do not provide a full picture of potential losses and gains in the event of a European default, giving only net numbers or excluding some derivatives altogether.
Guarantees provided by US lenders on government, bank and corporate debt in Greece, Italy, Ireland, Portugal and Spain rose by US$80.7 billion to US$518 billion in the first half of this year, according to the Bank for International Settlements.
Also on Wednesday, Moody’s Investors Service downgraded the senior debt and deposit ratings of 10 German public-sector banks, citing its assumption that “there is now a lower likelihood” that the lenders would get external support.
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