August 3, 2007 / 4:56 PM / 12 years ago

Subprime crisis could hit small European banks-analysts

By Andrew Hurst, European Banking Corespondent

ZURICH, Aug 3 (Reuters) - IKB’s IKBG.DE trouble with billions of euros of losses from subprime market bets shows other smaller European banks may not be immune, and analysts see German ones most at risk.

“There is no doubt there will be other surprises like IKB,” said the head banking analyst at an investment bank in London. “It could be a German public bank or a French or Spanish savings bank or a bank you never would suspect could pop up.”

Large investment and commercial banks are seen as far less exposed because they operate sophisticated risk management systems and have highly diversified portfolios.

Deutsche Bank (DBKGn.DE) and Credit Suisse CSGN.VX, which both reported strong second quarter results this week, assured investors that their exposure to the stricken subprime market was limited and manageable.

Credit Suise said subprime accounts for just 2 percent of its entire investment banking business.

Clear predictions as to who else might be drawn into the crisis are hard to come by, but regional German banks are seen as at least potentially exposed because of their past investment profiles.

“Track records and anecdotal evidence put German and Italian banks among the most likely suspects — in the past some of them have been buyers of higher risk investments in the U.S.” said Simon Adamson, senior analyst at CreditSights, a credit risk research house.

“The German Landesbanks, for example, have historically run diversified investment books to help improve their low core profitability,” he added.

MOODY’S WARNING

Smaller European banks could be vulnerable if caught high and dry with big exposures to instruments such as CDOs

(collateralised debt obligations), linked to U.S. subprime mortgages, said Moody’s Investor Services in a commentary on Friday.

The higher-risk equity and mezzanine tranches of CDOs are the most likely to trigger write-downs, forcing investors to make “mark-to-market” adjustments, using highly volatile market indices. “The financial impact (of subprime) could be more significant for a selected number of smaller banks in Europe,” said Moody’s.

“To the extent that smaller banks have significant direct or indirect exposures to the sub-prime sector, these institutions’ liquidity, risk management capabilities or financial resources may be less adequate to absorb any valduation adjustments.”

Ratings downgrades among smaller banks were more likely “to the extent that excessive concentrations are identified.”

The Basel II risk-sensitive capital framework, which European banks are phasing in this year, is not likely to provide much sanctuary for lenders. “The risk-weighting of assets is determined largely by credit ratings, either from rating agencies or internally generated by the banks,” said Adamson.

“As many of the investments that have lost value were, and still are, highly rated, I doubt whether Basel II would have captured the write-down we are now seeing.”

Moody’s said public disclosures made it practically impossible for investors to accurately quantify “each firm’s credit market and liquidity exposures within this troubled sector.”

For other stories on the IKB saga click [nL03855848]

((Reporting by Andrew Hurst, editing by Andrew Callus; Zurich newsroom +41.44.631.7336; fax +41.44.251.0476; zurich.newsroom@reuters.com)) Keywords: IKB RESCUE/SUBPRIME

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