BBC News - US bank shares tumble on eurozone exposure warning

Shares in US banks tumbled in late trading on Wall Street after ratings agency Fitch issued a warning over their exposure to the eurozone crisis.

The Dow Jones fell sharply in the last hour of trading, to close 1.6% lower, with financial stocks taking the brunt of the selloff.

Fitch said that unless the eurozone crisis is resolved soon, the outlook for US banks could worsen.

Meanwhile fellow rating agency Moody'sdowngraded 12 German banks.

Major US banks JP Morgan and Bank of America fell 3.8% and 3.3% respectively, while investment bank Morgan Stanley dropped 8%, after the Fitch report was released in the mid-afternoon.

France

Fitch said that the direct exposure of US banks to troubled European economies - Portugal, Italy, the Irish Republic, Greece and Spain - was "manageable", and noted that they have been cutting these exposures for over a year.

The banks generally do not publicly disclose information of their exposures to individual countries.

However, Fitch expressed doubts over whether credit default swaps - a common financial contract widely used by the banks to insure themselves against the risk of non-payment - would actually provide an effective hedge.

US banks may also be exposed to the eurozone crisis in other ways, such as through loss of business, or through disruption of the money markets on which they rely to raise cash, Fitch said.

And the rating agency raised concerns that France could also be drawn into the crisis.

The French government's borrowing costs have also begun to rise steeply in recent days, on fears that it may not be able to bail out the large but comparatively weaker economies of Italy and Spain, as well as the overstretched French banks.

Moody's indicated earlier in the month that it might downgrade the French government's top AAA rating, and more recently another rating agency, Standard & Poor's, accidentally sent out a French downgrade notice that it later retracted.

Sentiment in European government debt markets has been further strained by the open opposition of the Bundesbank to the European Central Bank (ECB) bailing out the Italian government.

The Bundesbank is the German central bank, and is officially subordinate to the ECB.

Many economists have called on the ECB to use its unlimited ability to create money to support Italy, thereby saving France and others from the need to use their own limited resources.

Landesbanks

Meanwhile, Moody's blamed its decision to cut the ratings of several public sector German banks on the "reduced political will [in Germany] to support future bank bailouts".

The downgrades mainly affected Landesbanks, which have enjoyed the financial backing of German regional governments in the past.

European competition rules, which restrict this support, were also a reason for the downgrade.