US Banks are Exposed to the Euro Debt Crisis

Recently I wrote about how US banks have been dependent on Bernanke’s QEs, where the unfolding Euro debt crisis could heighten risks a contagion on the US banking industry.

Also given that US banks have substantial exposures to European banks, it isn't farfetched to perceive a potential contagion from any further deterioration in the latter's banking sector.

The Huffington Post gives some numbers (bold emphasis mine)

If European politicians are unable to contain their sovereign debt problems, Wall Street could be on the brink of another financial crisis, according to economists.

Although U.S. banks have limited their direct exposure to Greece, they have loaned hundreds of billions of dollars to European banks and governments that may not be able to pay them back, according to the Bank for International Settlements. If some European governments and banks are forced to default on at least part of their debt, American banks could lose a significant amount of money on that account alone.

The resulting panic from investors could compound the losses. Short-term borrowing costs would spike, bank stock prices would plummet and investors could demand their money from banks, several economists say. In a repeat of the liquidity crisis of 2008, some U.S. banks could run out of the money necessary to fund their day-to-day operations…

Some predict that a European financial crisis would spread quickly to U.S. shores. The pain would not come directly from government defaults; U.S. banks have loaned just $36.2 billion to the five European governments that are in danger of defaulting: Greece, Ireland, Portugal, Spain and Italy. But U.S. banks have also loaned $60.6 billion to banks in those five countries, and $275.8 billion to banks in Germany and France, according to data from the Bank for International Settlements.

A string of sovereign debt defaults would endanger the survival of major European banks, including those in France and Germany, which hold a large amount of troubled sovereign debt on their books, some economists note. According to Bryson, French banks' exposure to the five European countries that are in danger of defaulting amounts to 25 percent of France's gross domestic product, and the exposure of German banks to those countries is worth 15 percent of Germany's total output…

It remains largely unknown which U.S. banks are particularly exposed to the risks in Europe, so investors have drawn their own conclusions. The insurance market reveals that investors believe Morgan Stanley is most at risk, followed by Bank of America, Goldman Sachs and Citigroup, respectively, according to market data provider CMA. Bank of America's debt now is more than three times more expensive to insure than during the height of the financial crisis in October of 2008.

Morgan Stanley and Goldman Sachs are particularly vulnerable to the crisis in Europe because they rely largely on short-term borrowing from other banks and do not have a large deposit base, according to an economist who requested anonymity because he is not allowed to comment on specific banks. During a financial crisis, short-term borrowing costs could spike as banks cut back on short-term lending to protect themselves, putting banks such as Morgan Stanley and Goldman Sachs in danger of running out of money, the economist said.

The cartel like existence and the depth of interconnectedness of the banking system of major economies makes them highly vulnerable to any shocks which the current Euro crisis has been exhibiting.

And that’s why bailout policies will likely continue and may even become coordinated with increased participation from outsiders, particularly the IMF and some of the major emerging markets.