European bank stocks suffered yet another steep selloff Wednesday, with a major French bank at one point plunging more than 20%, as investors were spooked by the combination of false rumors and mounting evidence of slowing Western economies.
At least 11 major European banks saw their shares fall 8% or more, an ominous sign for a sector whose stocks tend to trade in relatively narrow bands except in times of crisis.
The biggest decliners were the French banks, with shares of Société Générale SA ending down 15%, Crédit Agricole SA falling 12% and BNP Paribas SA down 9%. The U.S.-listed shares of Germany's Deutsche Bank AG lost 12%, and Spain's Banco Santander SA fell 9%. Italy's Intesa Sanpaolo SpA sank 14% in Milan.
The industrywide rout was triggered in part by rumors that Société Générale was in dire straits. "Talk that a French bank is about to go under," an executive at a U.S. brokerage firm wrote in an email to clients and reporters Wednesday, with the subject line: "FRENCH RUMOR..REPEAT RUMOR."
The rumor was false. In a statement issued after European markets closed, Société Générale said it is in solid financial shape and has limited exposure to troubled Southern European countries. The Paris-based bank said it has asked French regulators to investigate the rumors, which it said had damaged shareholder interests.
Société Générale has been battling unfounded gossip for days. Over the weekend, the Daily Mail, a British tabloid, published an article alleging that the bank was in a "perilous" state and on the "brink of disaster." The report was widely circulated among traders.
On Wednesday, the Daily Mail retracted the article. "We now accept that this was not true and we unreservedly apologise to Société Générale for any embarrassment caused," the paper said in a statement on its website.
The rumors' severe impact on markets underscores how jittery investors are, especially when it comes to the health of Europe's banking system.
For nearly two years, many investors and analysts have been arguing that the sector is undercapitalized and overexposed to potentially risky debts of cash-strapped countries like Greece, Portugal, Ireland, Spain and Italy. While regulators have repeatedly awarded clean bills of health to most European banks, investors remain worried that serious problems are lurking on their books, including in the form of government bonds issued by countries like Greece.
Many analysts played down the bank selloff, blaming the rumors and noting that euro-zone banks enjoy an essentially unlimited backstop in the form of loans available from the European Central Bank, which accepts euro-zone government debt as collateral.
"We think the current selloff [of French banks] is not justified and reflects more the fragility of the market," analysts at Sanford Bernstein wrote in a note to clients. They noted that one factor scaring investors, the rising price of insurance to protect against various banks defaulting on their debts, is based on thinly traded credit-default swaps.
"A trigger from a highly illiquid market has been hurting the stocks well beyond justifiable concerns about future earnings or potential capital raisings," the analysts wrote.
The pressure on the financial sector also appeared to be influenced by reports that European banks holding Greek sovereign bonds maturing in 2020 to 2025 might now also be included in a restructuring agreement with the private sector as part of the second bailout for the troubled euro-zone nation. The current proposed program covers only bonds until 2020.
Société Générale said it had no Greek sovereign bonds maturing after 2020 on its books and would therefore not suffer from an extension of the Greek bailout plan. Earlier this month, the bank said it had booked a €395 million ($562 million) provision against second-quarter earnings to cover likely losses on its portfolio of Greek sovereign bonds maturing between now and 2020.
The slide in bank shares came as concerns accelerated that France may see its top-notch credit rating challenged, despite a strong show of support from all of the major credit ratings agencies.
On Wednesday, Moody's Investors Service Inc., Standard and Poor's and Fitch Ratings all reiterated that they have triple-A credit ratings with stable outlooks on France, a point S&P has made every day this week. Such was the extent of the rumor-driven, choppy trading that the French government said a downgrade of its credit rating wasn't in the cards, pointing to comments from the ratings firms.
