Economics: In Euro Zone, Banking Fear Feeds on Itself

As Europe struggles to contain its government debt crisis, the greatest fear is that one of the Continent's major banks may fail, setting off a financial panic like the one sparked by Lehman's bankruptcy in September 2008.

This crisis has the potential to be a lot worse than Lehman Brothers, said George Soros, the hedge fund investor, citing the lack of an authoritative pan-European body to handle a banking crisis of this severity. That is why the problem is so serious. You need a crisis to create the political will for Europe to create such an authority, but there is still no understanding as to what the authority will do.

American institutions remain vulnerable to problems their French counterparts might encounter. At the end of the second quarter, JPMorgan Chase reported total cross-border exposure of $49 billion to France, while Citigroup had $44 billion and Bank of America had $20 billion.

Still, the huge stockpile of euros that banks have stashed away at the European Central Bank at rock-bottom interest rates — last night it hit a recent high of 166 billion euros — suggests that no bank is close to a Lehman-like failure.

For more, see In Euro Zone, Banking Fear Feeds on Itself by Landon Thomas Jr. and Nelson D. Schwartz, September 6, 2011 at NYTimes.com.