Apprehension lingers as US and European banks try to maintain their balancing acts

EUROPEAN banks are continuing to show signs of strain, making investors increasingly skittish about US financial institutions.

EUROPEAN banks are continuing to show signs of strain, making investors increasingly skittish about US financial institutions.

Regulators, bank executives and others continued to play down the risks on Thursday, emphasising that this would not be a repeat of the 2008 financial crisis. In Europe, political leaders vowed to prevent a Lehman-like collapse of a major bank, while American firms are better insulated from potential shocks than they were three years ago.

But on Thursday, shares of some big Wall Street banks sank to levels nearly as low as that in the months after the downfall of Lehman Brothers. Among investors, anxiety has been intensifying over the soundness of European banks despite repeated efforts to contain the sovereign debt crisis. The latest fears flared up after an unspecified lender tapped an emergency borrowing program set up by the European Central Bank to ensure that firms had ample funds in dollars.

On Wednesday the bank, which officials would not identify, borrowed $500 million, considered a relatively modest sum in global finance. But the move was widely viewed as a sign that Europe's financial problems were deepening, given that it was the first time a European bank had used the dollar pipeline since February.

Investors are also nervous that the world economy may tip back into a recession, putting new pressure on big US banks just as they appear to be finding their footing.

After a few fleeting days of relief, stress levels across the industry are once again rising. Credit-default swaps on major banks, which pay out in the event of a financial collapse, have again widened in the past few days. Borrowing costs are notching slightly higher. Tension on trading floors is palpable especially for the usually relaxed month of August.

To be sure, fears are nowhere near the levels reached at the depths of the financial crisis. Still, even measures taken to stave off another crisis are feeding the panic. Here in the US, news reports of heightened regulatory scrutiny have further eroded confidence and caused investors to dump their bank shares.

In Europe, temporary bans on short-selling of financial stocks, imposed last week by regulators in France and several other European countries, provided only a bit of relief. Traders say the measures have caused them to place some negative bets on bank stocks in countries that did not impose such measures, such as the US and Britain.

"There's a general climate of apprehension," said Jean-Pierre Lambert, a senior bank analyst with Keefe, Bruyette & Woods in London. "When you have doubts about names, it can turn into a vicious circle."

On Thursday, Citigroup shares plunged 6.26 per cent, to $27.98. Bank of America was down 6 per cent, to $7.01. Morgan Stanley and Goldman Sachs shares sank 4.76 per cent and 3.51 per cent respectively. Bank stocks are down about 30 per cent since January, and have swung wildly over the past few weeks.

The pounding was even more pronounced in Europe, where talk about the short-term financing challenges of the banks swirled through the stockmarket. Shares in Dexia, a large Belgian bank, dropped 14 per cent. Societe Generale fell 12 per cent. Two British giants, The Royal Bank of Scotland and Barclays, each had sharp declines.

US regulators have stepped up scrutiny of US and European lenders over the summer.

For now, US banks appear to be sound and are probably in better financial shape than they were on the eve of the 2008 crisis. But the fear is that the troubles brewing among European lenders could ripple across the Atlantic.

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