U.S. curbs darken clouds over European banks

The logo of Swiss bank UBS is seen on the roof of the office at the Paradeplatz square in Zurich September 16, 2008.

LONDON (Reuters) - A U.S. plan to limit banks in the most lucrative parts of their business and the threat other countries will follow suit hit shares in European lenders on Friday and raised fears for months of sector uncertainty.

Some European banks could see a small bite taken out of profits by the U.S. proposals, but the main impact was seen as

heightened uncertainty.

"The biggest risk is that we're under a cloud of uncertainty all the way through to the U.S. mid-term elections, which is effectively for the whole year," said Simon Maughan, analyst at MF Global.

President Barack Obama on Thursday threatened to fight Wall Street banks with new proposals to limit the scope and size of banks to reduce their risk taking, sending U.S. bank stocks tumbling.

European bank shares fell on the news in late trading on Thursday, and by 1130 GMT the DJ Stoxx European Bank index .SX7P was down 2.9 percent at 210.3 points, extending its slide since Tuesday to almost 8 percent.

Hardest hit were European banks with investment banking businesses, and Credit Suisse (CSGN.VX), Deutsche Bank (DBKGn.DE) and Barclays (BARC.L) all tumbled over 5 percent.

Royal Bank of Scotland (RBS.L) shed 7 percent and UBS (UBSN.VX) and Societe Generale (SOGN.PA) lost over 4 percent. Shares in HSBC (HSBA.L), Europe's biggest bank, were less affected because of its greater focus on Asian markets.

European banks conduct less propriety trading than U.S. firms such as Goldman Sachs (GS.N). Credit Suisse, Deutsche Bank and others have already been pulling back from that area amid a regulatory and political backlash since the start of the financial crisis.

European investment banks could see 6 percent to 8 percent of their value destroyed if Obama's main measures were adopted globally, according to an estimate by Matthew Clark at Keefe, Bruyette & Woods. Other analyst estimates ranged from under 5 percent to up to 15 percent.

Deutsche Bank's fixed income and over-the-counter businesses are most at risk from the proposals among Europe's banks, JP Morgan said in a note to clients.

"The really interesting thing is what Europe is going to do, and I can only think they will copy Obama," said Helvea banking analyst Peter Thorne. "These measures are not going to be restricted to the U.S., the anger that Obama and others have expressed is reflected in Europe."