CONTAGION: Markets are slammed as panic spreads from Wall Street to Europe
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Survival of the Fittest
What's clear, however, is that the meltdown is hastening a long-awaited consolidation of banks in Europe, with the emergence of a few strong pan-European and national players. Spain's Santander has taken advantage of the crisis to snap up its third British bank in recent years, taking on parts of Bradford & Bingley, while Lloyds TSB is making a grab for the flailing British lender HBOS. Noel Gordon, a banking expert at Accenture in London, expects this flurry of deals to continue. The winners will be banks such as Santander, Italy's Unicredito and Barclays, the British behemoth that recently agreed to acquire parts of Lehman's U.S. operations. Unlike their ailing rivals, these banks have spent the past few years cleaning up their operations and becoming more efficient and customer-friendly, at the same time as taking a more conservative approach to risk. These high-performance banks, Gordon says, "are head and shoulders above the others in the efficiency of their operating model."
But for every strong bank, it seems there are any number of weak ones. The institutions that have run into trouble have done so because they were undercapitalized, too heavily exposed to troubled U.S. mortgage-backed assets, or had business models that relied far too much on short-term borrowing to fund long-term lending. That was the case with Germany's Hypo, which was plunged into crisis by the difficulties of a subsidiary called Depfa that it acquired last year. Depfa specializes in providing long-term financing for public authorities in Germany and elsewhere, but its financing is heavily dependent on the short-term lending market that has dried up. Hypo was rescued by the German government and other German banks, which put up a total of $50 billion in credit guarantees. Fortis, by contrast, was crippled by old-fashioned hubris: last year it joined an international consortium to acquire Dutch rival ABN-Amro, and vastly overpaid for assets that are today rapidly depreciating.
Going forward, says Accenture's Gordon, "a lot of banks will be going back to basics. There will be more conservative funding, a less aggressive risk appetite — and a war for customers." If he's right, the current crisis may ultimately be salutary for Europe's banking sector. In the meantime, though, nobody knows how many more players out there today will be caught with their bathing suits down.
Fallen Giants
Five major financial firms have had to be rescued as the crisis deepens across Europe, exposing the vulnerability — and recklessness — of many lenders
Bradford & Bingley
Mortgage arrears, a property slump and derivative woes caused the high-street lender to hemorrhage money. The U.K. government is nationalizing its loans and selling its 200 branches to Banco Santander for $1.1 billion
Dexia
A huge lender to local governments around the world, Franco-Belgian Dexia was torpedoed by its bond-insurance arm's exposure to the imploding U.S. housing market. The French, Belgian and Luxembourg governments stepped in with a $9.2 billion cash injection
Fortis
With its stock in free fall, the Belgian-Dutch bank was rescued in a coordinated bailout by the governments of Belgium, the Netherlands and Luxembourg. They now own a major stake in return for a $16 billion lifeline
Glitnir
Investors in Iceland's third largest bank — also a niche player in seafood and shipping — took fright at its short-term funding problems. Iceland's government has taken a 75% stake in return for $860 million
Hypo Real Estate
After this giant property lender ran into liquidity trouble, Germany's government teamed up with domestic banks to provide a $72 billion bailout package
With reporting by William Lee Adams and Adam Smith / London and Leo Cendrowicz / Brussels
(See the ten steps to the financial meltdown here and TIME's photos of the global financial crisis here.)