Europe Beginning to Realize Its Lenders Share in the Blame

Other German banks have gotten into trouble by opening offshore subsidiaries in the Cayman Islands and Ireland, enabling them to avoid regulatory oversight back home. Hypo Real Estate Holding AG, Germany's second-biggest commercial lender, nearly collapsed last weekend because of problems at a subsidiary in Ireland, where a construction boom has deflated.

Similarly, the run on Dexia's stock last week was ignited by reports of liquidity problems following a large cash infusion into the bank's U.S.-based bond insurance subsidiary. Dexia, which counted the French government among its stockholders, had previously traded on its reputation as a conservative lender that focused on aiding municipalities in France and Belgium.

Partly in response, Sarkozy has stressed that European banks should refocus their energy on traditional domestic financial activities, such as business credit and consumer savings, rather than the type of foreign operations that contributed to Wall Street's meltdown.

In the same vein, Sarkozy lectured nine of France's top banking executives this week at the presidential Elysee Palace, saying they should avoid the loosely governed and often thinly guaranteed trading that French commentators have called "Anglo-Saxon banking practices."

"Return to your profession as deposit banks," Sarkozy told the bankers, according to an account provided to French journalists. "Reassure your clients."

Sarkozy said in a speech last week that banks also should adopt new compensation rules, arguing that current practices in France and other countries encourage traders and executives to take undue risks. If French banks fail to do so by the end of the year, he added, the government will do it for them.

In Britain, the government is preparing a banking overhaul bill that Prime Minister Gordon Brown said would include new regulations to end "the age of irresponsibility."

Previously, Brown had said the crisis "started in America." But other British officials and analysts cited growing recognition that the problems are largely homegrown.

In their view, British banks, like those in the United States, took on too much risk. "Toxic assets are the root cause," said Alex Potter, a banking analyst at Collins Stewart investment banking group in London. "The U.S., U.K., Spain and Ireland all have massively overvalued housing markets. When the bad debt comes through, that's massively magnified in fear. The U.K. housing market is going down in a way that the U.S. housing market is going down."

Although there has been a call for increased regulation of British banking, some people are worried that the restrictions could strangle the financial services industry, which has brought enormous wealth to the country.

"Of course there has been greed," said London Mayor Boris Johnson. But the financial sector "is a great British industry, and the last thing we want to do now is throw the baby out with the bathwater with some form of excessive regulation."

Cody reported from Paris. Correspondent Mary Jordan in London contributed to this report.