Major-bank shares tumbled Tuesday on rumors, later denied, that Brazil was planning to devalue its currency.
The murmurs about Brazil and its currency have swirled for many months. Speculation became intense Tuesday morning as the market awaited an economic austerity package to improve the country's weakened economy.
At midafternoon Brazilian officials denied that a currency devaluation was in the works, but nervous investors continued selling shares of money- centers and other big banking companies.
Brazilian President Fernando Henrique Cardoso was expected to outline the economic package at 5 p.m., Eastern Standard Time.
Major U.S. banks have larger exposures to Brazil than to any other emerging nation. Devaluation of the Brazilian real could make it more difficult for the borrowers in that country to repay loans or make interest payments on securities to bankers.
When Russia last summer defaulted on bonds and subsequently devalued its currency, investors dumped money-center shares with a vengeance. But U.S. banks' Russian exposure is small in contrast to that in Brazil.
Investors also fear that unresolved economic woes in Brazil could spread to other Latin countries, such as Argentina or Mexico.
According to analyst Raphael Soifer of Brown Brothers, Harriman & Co., regulatory data show cross-border exposure to Brazil for all U.S. banks at June 30 was $27.4 billion-including $18.4 billion on the books of the six money-center banks and $5.1 billion for seven large regional banks.
Cross-border exposure includes all credit exposure on and off the balance sheet, which includes loans, derivatives and other securities.
The seven regionals are: the old BankAmerica Corp., BankBoston Corp., First Union Corp., the old CoreStates Financial Corp., Bank of New York Co., Republic New York Corp., and State Street Corp.
"It is not clear what the consequences of a Brazilian devaluation would be," Mr. Soifer said. "But there would be fallout, and that uncertainty leads investors to sell stocks."
Indeed, the Standard & Poor's bank index fell 2.64%, and the blue-chip Dow Jones industrial average, 0.78%. The Nasdaq bank index fell 0.08%; and the broad-market S&P 500, 0.65%.
Big losers of the day among banking companies included J.P. Morgan & Co., down $3.5625, to $89.625, and Citigroup, $2.625, to $43.6875. Bankers Trust Co. fell $2.875, to $60, after a downgrading by Keefe, Bruyette & Woods Inc.
Investors also sold money-centers because they fear that corporate finance opportunities for many major banks, including underwriting activity, are severely limited, said Joan T. Goodman, bank analyst at the Pershing division of Donaldson, Lufkin & Jenrette Securities Corp.
Not all banks stocks fell Tuesday. Gainers included Mercantile Bankshares of Baltimore, up 75 cents, to $31.50, and Star Banc Corp. of Cincinnati, $2.25, to $73.1875. Both companies' shareholders Tuesday approved its acquisition of Firstar Corp. of Milwaukee.