Bank shares weigh on Europe's stock markets

Europe’s banks have weighed on stock markets again today as fears over their solvency and funding sources remained heightened.

Switzerland’s number one and two banks UBS and Credit Suisse have been forced to deny that they were the as yet unnamed bank that tapped the European Central Bank for a $500m dollar loan for the first time since March.

The news that a bank was forced to pay an uncompetitive rate for emergency dollar funding has shaken markets and commercial rates for dollar loans have continued to rise since.

The three-month euro-dollar cross currency basis swap, which falls when dollar funding costs for eurozone banks rise, has fallen about six basis points to minus 88bps.

It is likely to reflect some US lenders’ decision to hold onto cash rather than lend it to European institutions.

Investors also fear European banks - and particularly French institutions – are too dependent on short term funding, leaving them vulnerable to market shocks that cause funding to freeze.

Despite a ban on short selling their shares, France’s biggest banks were still the heaviest fallers on the CAC 40 index – Societe Generale was down 2.2 per cent while BNP Paribas is 3.4 per cent down on yesterday’s close.

Both are underperforming the overall index, which is down 1.5 per cent.

The Eurostoxx banking index is down 2.3 per cent and has lost 32 per cent since the start of this year.

In Switzerland, UBS is now trading down 0.9 per cent lower while Credit Suisse is off by two per cent.

Germany’s Deutsche Bank is also down 3.8 per cent below the overall DAX performance of 2.8 per cent off.

UK banks are also suffering, with RBS and Lloyds among the FTSE 100’s heaviest fallers. Lloyds is down 5.3 per cent while RBS is off by 4.4 per cent.

The UK's banks are also among those showing some of the biggest spikes in the cost for short-term dollar funds.

The three-month dollar interbank borrowing rate for Barclays and RBS is now among the highest of those used in the daily LIBOR fixing.