Insight: U.S. readies defenses against Europe spillover

Sun Nov 13, 2011 6:10pm EST
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By David Lawder and Glenn Somerville

HONOLULU/WASHINGTON (Reuters) - The United States is ramping up attempts to safeguard its financial system from a worsening of Europe's debt crisis, joining nations in Asia, Latin America and elsewhere in trying to build firewalls.

U.S. policymakers, alarmed by the political upheaval in Italy and Greece, are digging deep into the books of American banks to find out how exposed they might be to euro zone creditors and the plunging value of sovereign debt.

Officials were stung by the implosion of Wall Street firm MF Global, which gambled and lost on European debt, and they are working on contingency plans for a worst-case scenario should another financial firm crumble.

A senior U.S. Treasury official said regulators are contacting big U.S. financial institutions to make sure they are scaling back exposure to Europe and are ready for a potential worsening of the crisis.

The Financial Stability Oversight Council, an inter-agency group set up after the 2007-2009 financial crisis, was trying to identify specific firms that could be hit by financial turbulence and then sort out ways that each one can fortify its balance sheet, the Treasury official said.

While the Treasury has been at pains to say that direct U.S. bank exposure to European countries now receiving bailout aid -- Greece, Ireland and Portugal -- is moderate, once the debt of Italy and Spain, plus credit default swaps, and U.S. bank indirect exposure through European banks are added, the potential sum could exceed $4 trillion.

"As such, the potential for contagion to the U.S. financial system is not small," the Institute of International Finance, the lobby group for major international banks, said last week.

Hedging and netting would limit the true size of any losses, so the $4 trillion figure would be the outer edge of U.S. total exposure.   Continued...