Why Stock Traders Worry About European Banks

Player utilities

This story is based on a radio interview. Listen to the full interview.

Audio Transcript:

Lisa Mullins: It's pretty rough out there for investors too. The Dow Jones Industrial Average ended down today. The Dow lost 173 points to close at 10,818. Stock markets in Europe also lost some ground today and the markets in South Korea plunged by more than 6%, that's the biggest fall there since 2008. Many factors account for the volatility of the markets. Among the most worrisome though are concerns about the strength of European banks. It's prompted a sell off of shares in those banks. Otis Casey is an analyst with a company named Markit, which is in New York.

Otis Casey: Some of the activity we're seeing in the market does suggest some kinds of panic, but you know, I think whether the reaction is overdone or not is not simply a matter of academic debate. I think some of that reaction is probably justified considering the negative news that's out there.

Mullins: Do you find it surprising that at this point people would have any kind of concern about the banks themselves and that they would be considered a risk factor?

Casey: I think that investors are becoming concerned about the banks in light of these reports that there's some banks with challenges in terms of obtaining funding.

Mullins: And what's the proper way to look at those challenges for you? I mean as real threats or just let's see what happens?

Casey: Well, I think you know, we have to be very diligent that these could become real threats if investors respond in a way that goes beyond just selling stock in the banks and go towards more of bank panic kind of mode where they start drawing down deposits because they've lost confidence in their deposits being safe in banks. Then I think we can see even further turmoil than what we've seen in the past few weeks.

Mullins: Why would this happen now though because the economic problems in Europe have been around for some time.

Casey: There's been a report recently that the European Central Bank has been able to obtain dollar access to one particular bank that has not been identified, and you know, this has prompted investors I think to speculate as to which bank that might be, as well as you know, ask the natural question of how pervasive that problem might be; whether there might be other banks that also need this kind of help.

Mullins: So they don't know which one, so basically, get rid of all the shares?

Casey: The volatility of the past few weeks of the equity market has seemed to unnerve investors and they're more inclined to get out first and ask questions later.

Mullins: Now I wonder though at the same time, Otis, if there's an element to this problem being self-perpetuating, or are there real long term ailments specific to banks and specific to banks in Europe that markets have only now woken up to?

Casey: I think there is the chance that it could be self-perpetuating. People are starting to wonder aloud if that's the case. You know, if we continue to see the kind of volatility in the equity markets for example that we've seen in the last few weeks. Investors may lose confidence for some length of time in the financial markets in terms of believing that their money and can find a safe place to invest. I think this is why you've seen investors pull their money out of the equity markets and move them into US bonds and gold because they're concerned that their money needs to be in safer assets.

Mullins: I wonder also if certainly not to blame the messenger, but if you believe that the way this is all being reported worldwide is having an impact on what the markets are doing?

Casey: I think it's really hard to separate the two. Clearly the substance of most of the news right now and you know, the economic data sets suggest that you know, we're in a global economic slowdown, growth is tapering off, there's more concern about risk in the European financial sectors, so there's a lot of bad news out there.

Mullins: Otis Casey of Markit, a financial information services provider, speaking to us from New York. Thanks very much.

Casey: Thank you.