Global Bank Crisis Fears Are Overstated

- The credit crunch triggered by a rout in the U.S. subprime housing market doesn't pose a ``systemic'' threat to banks, Moody's Investors Service said.

``The `core' of the system is still comfortably shock- resistant,'' Moody's said in a statement today. ``U.S. and international financial institutions have a high pain threshold.''

Mortgage defaults by Americans with poor credit histories prompted the collapse in June of two hedge funds managed by Bear Stearns Cos. and triggered a worldwide rout in the debt markets. The European Central Bank and other central banks have injected more than $350 billion of emergency funds into money markets to reduce banks' borrowing costs. The U.S. Federal Reserve last week cut its discount rate by 0.5 percentage point to 5.75 percent.

Concern about risks to banks increased as Germany's government organized a rescue package for Dusseldorf-based IKB Deutsche Industriebank AG because of potential subprime-linked losses of as much as 3.5 billion euros. BNP Paribas SA, France's biggest bank, this month halted withdrawals from three of its investment funds, a week after BNP Chief Executive Officer Baudouin Prot said the bank wasn't at risk.

``Confusion and uncertainty of risk is creating this liquidity problem,'' Moody's Senior Vice President Pierre Cailleteau said. Sometimes banks are affected indiscriminately, ``requiring more frequent market-stabilizing operations,'' he said.

Under Fire

The Fed's intervention helped restore confidence to global stock markets after a rout that wiped out $5.5 trillion of market value. The Standard & Poor's 500 Index staged its biggest rally in four years after the Fed's Aug. 17 action.

The Moody's statement comes as it, Standard & Poor's and Fitch Ratings come under criticism from fund managers and politicians who say the companies failed to provide timely warnings to investors about problems in the subprime market.

The credit assessors must ``shoulder some responsibility'' for the subprime debacle, Richard Shelby, the U.S. Senate Banking Committee's top Republican, said this week. Credit-rating companies face congressional scrutiny for an ``inherent conflict'' in helping construct loan-backed securities, then issuing ratings on them, Shelby said.

``There is distinct conflict of interest within rating agencies because of the fact they earn the bulk of their revenues from issuers, not investors,'' said London-based Robert McAdie, global head of credit strategy at Barclays Capital. ``They certainly have responsibility for what's happened today and they'll be forced to change their income structure and they need to be more regulated.''

`Panic Stations'

German Chancellor Angela Merkel has said she supports a probe of the rating companies. The European Commission also plans to review the issue.

Global financial markets and the world economy are at ``panic stations,'' HSBC Holdings Plc, Europe's biggest bank by market value, said in a report published yesterday.

``Should the panic exhibited over the last few days turn into revulsion, the markets may never be the same again,'' wrote HSBC economist Stephen King and strategist Richard Cookson. ``The implied liquidity drain might leave the financial system, and the broader economy, more vulnerable than we currently believe.''

Moody's said the banking system may be more dependent on ``episodic liquidity assistance'' from central banks than originally thought.

Still, the cost of the cash injections by central banks to smooth the markets would be minimal compared with the damage that may be caused by a potential dislocation of the financial markets, Moody's said.