Why European governments dare not let banks fail

By Andrew Hurst, European Banking Correspondent - Analysis

ZURICH (Reuters) - Whatever their political hue, no European government has dared let a bank go bust since the outbreak of the subprime crisis.

That appears to be one of the lessons after Britain decided at the weekend to nationalise ailing mortgage lender Northern Rock and Germany drew up plans for a fresh bailout of stricken bank IKB.

Two factors have weighed heavily on governments and regulators in Britain and Germany -- the growing importance of financial services in a post-industrial economy and fear that a bank failure at the height of a global credit crisis could set off a cataclysmic chain reaction.

"When push comes to shove governments will intervene and support banks in a very major way," said Simon Adamson at CreditSights in London. "Banks cannot be allowed to fail especially when markets are in a fragile state."

The collapse of subprime mortgages set off a global credit crisis as banks around the world were forced to write down the value of their investments in complex securities whose value was wiped out as borrowers defaulted on their loans.

The credit crunch has hit banks in different ways, threatening IKB with collapse in July, as the value of its subprime investments wilted, and triggering the first run in 140 years on a British bank as customers besieged Northern Rock.

Switzerland's UBS has been the biggest casualty among Europe's global banks, taking more than $18 billion in writedowns on its subprime exposures in 2007, but has been able to line up a capital injection from Singapore and the Middle East without seeking help from the authorities.

"Although UBS's writedowns dwarf those of other banks, it can absorb them. It was not in the desperate situation of the Germans or Northern Rock," said Adamson.

EUROPE'S HISTORY OF BANK FAILURES

Northern Rock had no direct holdings of subprime investments but found its main source of funding -- borrowing from other banks -- had dried up when financial institutions shrank from lending to each other as the subprime crisis gathered pace.

Bank failures, even involving large lenders, are not unheard of in Europe but government-orchestrated bailouts have often ensured that depositors did not lose their savings.

Italy's Banco Ambrosiano collapsed under a welter of bad debts in 1982 and was rescued by a consortium of Italian banks organised by the Bank of Italy. More than a decade later Banco Santander saved Banesto from failure in 1994 by taking the bank over at the request of the Spanish central bank.

BCCI was wound up in 1991, but it did not have a large retail network in Britain. Media images of throngs of anxious customers trying to get their savings out of Northern Rock prompted the British government to guarantee deposits.

Merchant bank Barings was bought for a token sum by Dutch bank ING in 1995 after rogue trader Nick Leeson bankrupted the company, but it too had no retail customers.

Banks may have never been more prominent in Europe's economies than they are now as industry recedes.