UK banks told to declare sovereign debt exposure

The Financial Services Authority (FSA) has stepped up scrutiny of UK banks' exposures to foreign government debt as fears of European sovereign debt contagion sent markets into a renewed frenzy yesterday.

The City watchdog is in talks with Britain's banks and their auditors to ensure consistent disclosure of their sovereign holdings according to the standards of the recent European stress tests in their year-end results.

As fears over which banks could be hit by downgrades of sovereign bonds continue to rattle markets, the FSA has also upped its day-to-day monitoring of UK lenders' exposures.

An FSA spokeswoman said: "We have been holding discussions with the banks and their auditors in relation to their sovereign exposures. What we are looking for is greater consistency and disclosures across firms to give the market clear information."

Yesterday marked another round of turmoil for Europe's banks as fears about exposures to debt-stretched economies made investors question their ability to fund in the market.

Shares in Société Générale (SocGen) gyrated as the French lender sought to stamp out doubts about its financial strength. The bank was the focal point of Wednesday's rout of bank shares.

SocGen's chief executive, Frédéric Oudéa, staged a fightback overnight, dismissing negative speculation as "absolute rubbish". He called for the French market regulator to investigate the source of market rumours.

"People are scared so the tiniest information touches off irrational fears," he said. "[Clients] should not listen to this stuff, which is totally baseless."

His comments rallied the shares but they then fell more than 9 per cent in a day of frenzied trading before closing up 3.7 per cent. Speculation about a European ban on short selling helped to boost shares. BNP Paribas, France's largest bank, closed up slightly after falling up to 7.5 per cent earlier.

However, average short interest across the Euro Stoxx banks sector was 2.85 per cent, only marginally above the average for European companies, according to Data Explorers figures.