European banks harder hit by credit crunch

FT. By Gillian Tett in London

Published: June 5 2008 19:55 | Last updated: June 5 2008 19:55

European banks have now suffered considerably more losses because of the credit crunch than their US rivals, even though the turmoil was first triggered by problems in the US subprime mortgage market.

Of the $387bn in credit losses that global banks have reported since the start of 2007, $200bn was suffered by European groups and $166bn by US banks, according to data from the Institute of International Finance, a Washington-based banking group.

The pattern appears to have arisen because the success of US banks and brokers in selling packages of subprime securities and other linked instruments to European groups in recent years.

However, the data also show that European institutions have raised only $125.5bn of capital to compensate for the losses compared with nearly $141bn raised by their US rivals.

This discrepancy is likely to make investors scrutinise the balance sheet position of European institutions as it implies that European banks will either need to raise more capital or cut their lending.

"American banks have reported smaller losses than European banks ... while raising slightly more capital," the IIF says, noting that the vast majority of losses are linked to swings in the market price of instruments, rather than tangible credit defaults.

This is a contrast to the pattern seen in previous crises such as the US Savings and Loans crisis, when the bulk of losses was experienced by local banks.

In recent years, investment banks have become adept at slicing and dicing risk into securities which can then be sold to investors across the world. Regulators believe this has made it easier for the banking system to absorb the recent credit turmoil as the pain has been spread.

"The risk of subprime mortgages has been dispersed to Europe and Asia, and within the euro area, bank losses were relatively widely spread," Imene Rahmouni-Rousseau, head of the financial stability division at the French central bank, told a conference of bankers this week.

However, this dispersion of losses has also made it hard for regulators or investors to predict which institutions would be vulnerable to problems. For example, German lender IKB's losses came as a shock last year since policymakers had not previously known that the group was so exposed to US mortgage markets.

Concern also remains that some European groups are still being slow to reveal exposures