NEW YORK — U.S. bank stocks slumped Wednesday as the market turned ruthlessly on Italy, raising fears about the third-largest economy in Europe and its ability to remain current on debt payments.
The latest scare, which sent the yields on Italian bonds above what is considered a sustainable rate of 7%, worried investors in U.S. banks for two reasons: that a faltering by Italy would severely jolt the global economy, and that banks are exposed directly to any default. One clearinghouse had demanded more collateral for trading Italian bonds, signaling the market's fear.
"The market, at some level, has been held hostage by Europe over the last few weeks and months," said Steve Sosnick, an equity risk manager at Timber Hill/Interactive Brokers Group. "The financials are dealing with it worse because if clearinghouses are requiring greater margin on sovereign debt, anyone who holds that debt has to potentially put aside money that they otherwise could use more productively."
The KBW Bank Index fell 3.3%, slumping worse than the Standard & Poor's 500-stock index's 2.3% slip. The biggest banks were some of the worst performers, though each has maintained exposures are manageable.
"In this shoot-first-and-ask-questions-later mentality, the market is punishing those [banks] it believes have exposure in Italy," Sosnick said.
Jefferies Group Inc. (JEF), a midsize investment bank, led the declines among U.S. financials, dropping 6.7% to $11.61 after earlier falling 8.5%. The firm, which faced swirling questions about its exposure to Europe last week, said Monday that it cut its gross holdings in European sovereign securities in half.
Before that announcement, Jefferies had reported a $1.9 billion long-and-short position, or $36 million in net exposure, to Italy as of early Monday. The firm has said its positions contain no credit-default swaps.
JPMorgan Chase & Co., the largest U.S. bank by assets, said its exposure to Italy at the end of September included $6.1 billion of sovereign trading risk, which includes credit-default swaps it sold. It had $2.1 billion in trading exposures to non-sovereign entities and $2.9 billion in loans.
The bank says it has hedges and collateral that reduce total exposure to $5.5 billion.
Chief Executive Jamie Dimon has been adamant JPMorgan wouldn't abandon risky countries. "A lot of these clients, you can't say you're going to be [their] bank one day, and the second things get tough, you go away," he said.
JPMorgan shares fell 4.2% to $33.57.
Bank of America Corp. said it has $1.5 billion in sovereign Italian exposure and $2.2 billion in non-sovereign. It also has an additional $2.8 billion in loans to multinational corporations based in Italy but not made in euros.
Bank of America said it has protection equal to 80% of the sovereign exposure, and 5% of the non-sovereign.
"Our sovereign exposure to Italy is minimal when you look at it in the scheme of overall numbers and the credit-default protection," a bank spokesman said Wednesday.
Bank of America shares fell 3.1% to $6.33.
Meanwhile, Citigroup Inc., which touts its global presence as a strength, fell 5% to $29.83.
Citigroup hasn't broken out its exposure to Italy, saying only it faced about $7.2 billion in net exposures, including hedges, to Greece, Ireland, Italy, Portugal and Spain. The bank had reduced the exposure from $11.6 billion three months earlier.
In a regulatory filing Wednesday, Goldman Sachs Group Inc. said it had $2.3 billion in gross exposure to Italy and $700 million in net exposure, with hedges. The figures include exposure to sovereign and non-sovereign entities. The investment bank created a new chart, which provided a sharper look at its credit exposure after previously disclosing less-detailed information.
Goldman's shares dropped 5.2% to $102.93.
Morgan Stanley, which has faced questions about its exposure to Europe, disclosed it had $4.6 billion in gross exposure and, with hedges, $1.8 billion in net funded exposure to Italy. The figures, which include obligations from sovereign governments, corporations, clearinghouses and financial institutions, were issued last month along with its third-quarter report as Morgan Stanley sought to assuage investors' concerns about how much it could stand to lose if European banks defaulted.
Morgan Stanley shares dropped 6% to $16.28 recently.