Shares in some of Europe's largest banks fell by 10pc as the cost of insuring European lenders' senior bonds rose to record levels, according to credit default swap prices. The Markit iTraxx Financial Index of contracts on the senior debt of 25 banks and insurers climbed to an all-time high 315.5 basis points.
The last banking crisis was regarded by most eurozone members as an Anglo-Saxon phenomenon caused by lax lending controls that resulted in major UK and US institutions either collapsing or having to take costly state-funded bail-outs.
To offset the threat of another crisis spreading across the eurozone, European regulators ordered their banks to increase their liquidity buffers. Government bonds were generally viewed as the most liquid and least risky assets to hold. However, this policy has come back to haunt them, leaving many lenders across the region seriously exposed to the eurozone sovereign debt crisis.
French banking giants BNP Paribas and Société Générale are among the hardest hit. Recent estimates suggest BNP has eurozone sovereign debt exposure of about €75bn (£65bn), amounting to roughly 6pc of total assets, including €14bn of Greek debt and €21bn of Italian government bonds. The other two major French banks, SocGen and Credit Agricole, each have exposures of a similar size.
Between them, France's banks have about €56bn of Greek sovereign bonds alone, and have so far taken 20pc writedowns on this.
On Wednesday, the International Monetary Fund (IMF) warned that Europe's debt crisis had exposed the region's banks to €300bn of potential losses. The Washington-based fund said certain European banks needed to "urgently" bolster their capital buffers to protect themselves – although its staff insisted the €300bn estimate did not represent the amount of capital banks must raise.
If banks cannot raise capital in the credit markets which are currently all but closed to them, then taxpayers must pay, the IMF added; first at a national level and ultimately through the use of the European Financial Stability Facility, the eurozone's €440bn rescue fund.
The problem is only likely to intensify following Monday's downgrade of Italy's credit rating by Standard & Poor's and discouraging signals from the US economy throughout the week.
In the UK, minutes from the Bank of England's Monetary Policy Committee (MPC) meeting in September showit is not just the continental Europeans who are concerned by the problem.
"In financial markets there had been a generalised fall in prices of risky assets and deterioration in bank funding conditions," the MPC said. "If recent conditions in capital markets persisted, European banks could face difficulties obtaining sufficient funding to continue current levels of lending. These conditions could affect UK banks even though they had increased their capital and liquidity levels over the past two years and had already met a significant proportion of their funding needs for the year as a whole."
In this age of uncertainty, one thing does seem certain: Europe's banking sector stands on the precipice of a new crisis.
Meanwhile, Goldman Sachs is on course to report its second ever quarterly loss, said analysts at Barclays Capital. The bank, whose only other losing quarter followed the collapse of Lehman Brothers, has been hit particularly hard by falling world stock markets, according to the report, with the volatility in prices making trading revenues harder to generate. Goldman releases its results on October 18.
European bank share price falls on September 22, 2011
Lloyds Banking Group -10.09pc
Société Générale -9.57pc
Credit Agricole -9.49pc
Deutsche Bank -1.38pc
BNP Paribus -5.7pc
Royal Bank of Scotland -5.69 pc
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