How bad will it get for the banks?

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from USAToday,

There are growing fears that global banks are headed for a meltdown, the likes of which has not been seen since 2008. Only this time, there will be no one there to rescue them.

The biggest concerns center on major banks in Europe, where industry giants have seen their shares tumble a third in value already this year.

Shares of U.S. banks, like JPMorgan Chase (JPM) and Wells Fargo (WFC), have also taken a beating, but they are faring better amid expectations that they are dealing with fewer headwinds and that they are, in some cases, better positioned to weather the storm.

German bank Deutsche Bank is leading the doomsday procession with a stock price that has fallen below the levels hit in the darkest days of the financial crisis. The cost of insuring Deutsche Bank’s debt against default has also skyrocketed, suggesting investors fear trouble ahead.

So how likely is it that banks will suffer another meltdown? Experts say it will depend a lot on the economy and interest rates. And in that regard, U.S. banks are better positioned than their European counterparts — at least for now.

*Interest rates: One of the biggest risks facing banks currently is persistently low interest rates. Banks earn money off the spread between what they charge for loans and the cost to borrow, or interest paid on deposits. Super low interest rates, intended to spur lending, pressure their earnings.

For European banks, the pressure is worse because they are dealing with a controversial experiment in negative interest rates in which they essentially have to pay central banks to park their money. The U.S. federal fund rates, by contrast, hoovers at closer to 0.25% and 0.5%, with expectations that it could go higher this year.

*Economic woes: Despite signs of a global economic slowdown that have helped send energy prices tumbling, the U.S. economy is still growing — albeit at a slow rate. And Wall Street executives are insistent that lending activity remains strong, and the risk of defaults low.

Europe’s economic woes are much more tangled, due in part to its exposure to nations, like Greece, that are still struggling to recover from the financial crisis.

“Part of the weakness of bank stocks relates to general concerns about still high levels of private and public sector debt in much of the euro-zone,” said Jennifer McKeown, a senior economist at Capital Economics in London. “More recently, those fears have been compounded by the impact on some companies and loans of the slump in energy prices and concerns over China,” she said.

*Capital ratios: One of the biggest concerns for banks surrounds their need to increase their cash safety net whenever risk levels rise. The banks have been doing this since the financial crisis, mostly by selling risky assets and aggressively cutting costs.

But some European banks are facing renewed fears over their capital buffers due to their exposure to energy and some unexpected expenses.

Credit Suisse, for example, just said it would cut 4,000 jobs following a mammoth $5.3 billion loss in the fourth quarter — its first loss in eight years.

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