Bank of America — still struggling to iron out the portfolio of bad loans it acquired by buying the giant mortgage lender Countrywide Financial in 2008 — is an extreme case, but it is not alone. Just three years after the financial crisis drove some of the biggest names in finance to the brink of collapse, the combination of European disarray, the downgrading of U.S. debt and a stagnating global economy have rekindled fears about the banking sector’s stability.
Thursday, those fears gripped investors again, driving U.S. stock markets down as much as 5 percent and pummeling banking shares even worse. Shares of British-based Barclays closed down more than 11 percent; Credit Suisse dropped 9 percent; UBS fell more than 8 percent; and Citigroup and HSBC were down more than 6 percent.
One factor: word that the Federal Reserve Bank of New York has stepped up its scrutiny of European banks, seeking information about their ability to fund themselves. Banking sources said French giant Societe Generale, one of the biggest lenders to Greece, has been unable to obtain overnight funding from private firms and has been relying on the European Central Bank for support.
This time, however, battered bank shares are not a sign that bailouts from U.S. taxpayers are on the horizon.
By almost any measure, banks are on far better financial footing than they were in the bailout days of 2008. They have fewer bad investments on their books. They have more cash on hand to deal with troubles, seen and unforeseen. They are receiving essentially free loans from the Federal Reserve — because of the near-zero interest rates set by Fed policymakers — and are turning profits in some business areas.
“We all took our leverage down” since 2008, said a senior New York banker dealing with commercial real estate who did not have the bank’s authorization to speak publicly. “It’s different now.”
But that is cold comfort to shareholders, banking experts say. Wall Street banks still have plenty of problems that continue to weigh down their bottom lines, some of their own making and some — such as the banking crisis in Europe and the growing hesitancy among U.S. borrowers — that remain largely out of their control.
Shareholders, rather than taxpayers, are likely to shoulder whatever burden arises as banks atone for the bad decisions they made before the crisis and struggle with the sluggish economy.