Banks plunge amid worries over eurozone exposure

The Fed's concern is to ensure that any funding problems at a big European bank do not infect the rest of the system

European banks bore the brunt of the market sell-off last night amid reports that regulators in the US have stepped up their oversight of the companies, in case a new market panic causes disruption to their operations.

The Federal Reserve has been holding meetings with senior executives at some of the eurozone financial institutions that have major businesses in the US to get a clearer picture of their liquidity position and their contingency planning.

The market reacted with alarm to that news, which came hours after the European Central Bank revealed it had lent $500m (£304m) in one-week funds to one unnamed institution. The fact that the sum was in US dollars put the spotlight on eurozone's US funding needs, and on the question of whether money market funds and other short-term lenders in the US were still happy to fund European banks' US operations.

According to CNBC, European banks have been drawing down reserves held at the Fed since July, which is why the Fed has stepped up its oversight activities. Traders are debating whether sovereign default and the widening crisis of confidence in the eurozone will cause big losses on European banks' government bond holdings.

The sell-off in bank stocks was sharp. France's Société Générale was down by more than 12 per cent, while Italy's Intesa Sanpaolo fell by 9 per cent. Local peer Unicredit was also behind, shedding more than 7 per cent. UK banks were not spared, with Barclays down by 11.5 per cent at 154p and Royal Bank of Scotland off 11.3 per cent at 21.95p.

The Federal Reserve's concern is to ensure any funding problems at a big European bank do not infect the rest of the financial system, but US banks, too, were being sold off last night. Goldman Sachs was down 4 per cent, and Bank of America, owner of Merrill Lynch and one of the largest networks of US high-street branches, was off 7 per cent in lunchtime trading.