Banks brace for more troubles

Reporting from Washington —  Bank of America Corp. disclosed another round of layoffs, but federal regulators and industry analysts believe the bank and the financial industry in general are healthy.

It’s the European banks they’re worried about.

Just as the collapse of the U.S. housing market three years ago and Wall Street’s subsequent credit crunch sent shock waves around the world, federal officials fear the European debt crisis could hurt big banks there and trigger major problems here, perhaps dragging the U.S. into another recession.

“Like Europe was vulnerable in the crisis of ‘08, the U.S. is vulnerable now,” said Nicolas Veron, a senior fellow at the Bruegel think tank in Brussels. “At this point, there are big risks in Europe, but the situation has not exploded.”

Federal regulators are closely monitoring events in Europe. Many banks there are saddled with large holdings of bonds from troubled nations such as Greece, Italy and Spain, but regulators in the decentralized European Union have less power to stem a crisis should it arise.

“We’ve been in close communication with our counterparts in Europe on the situation there for many months. It’s clear they’re working hard to address the situation,” said a U.S. official who was not authorized to speak publicly and requested anonymity. “They face a difficult challenge, but we believe they have the ability and the will to meet their obligations.”

Exacerbating the European problem are the lower financial cushions held by many banks. Most notably, regulators there did not require banks to raise large amounts of capital as U.S. regulators required after conducting tough bank stress tests in 2009.

“In the U.S., even though the housing market remains a problem, there’s a general feeling the core of the banking system was restored to health by mid-2009,” Veron said. “The Europeans never found the nerve to address their banking situation.”

U.S. officials have been worried about the potentially toxic combination of soaring sovereign debt from some key European nations and exposure to it by banks there that have not been required to buttress their finances enough.

Sheila Bair, former chairwoman of the Federal Deposit Insurance Corp., warned lawmakers in June that problems in Europe made the prospects of further banking problems “unsettlingly high.”

And some U.S. institutions still must work through post-recession problems.

On Friday, Bank of America said it was cutting 3,500 workers, on top of the 2,500 shed earlier this year. The company had about 288,000 employees as of June 30.

“The company regularly assesses the efficiency of its businesses and at times makes adjustments to meet the opportunities in the marketplace,” spokesman Scott Silvestri said.

BofA’s stock has plummeted more than 27% in the last month and almost 50% so far this year as the company struggles to deal with a portfolio stuffed with bad mortgages it inherited in its 2008 acquisition of Countrywide Financial Corp. in Calabasas, once the nation’s biggest mortgage lender.

BofA already had announced plans to close 10% of its lowest-performing branches and is in the midst of a broad study for ways to further streamline its operations.

Attempting to buoy their sinking stock prices amid fears of another recession, other U.S. banks also have been talking up cost-cutting.

For example, Wells Fargo & Co. has started its own streamlining project, called Compass. “As the company finds duplication or identifies work that can be eliminated, it is likely to lead to staff reductions,” a spokeswoman said Friday.

Despite the problems, the U.S. banking system looks like a “bastion of strength” compared with Europe’s, said Bert Ely, an independent banking analyst.

Profits at U.S. banks rose in the first quarter, the seventh straight quarter of year-over-year growth, according to the FDIC. Second-quarter data will be released next week. Although there have been 67 bank failures so far this year, the pace has slowed compared with last year, when 157 banks failed overall.

“The far greater concern is about European problems spilling over into the U.S.,” Ely said.

Bank of America might have to raise more capital, but it doesn’t have the problems of some European banks, Ely said. He noted reports that an unnamed European bank had to borrow $500 million from the European Central Bank to handle its short-term cash flow, the largest amount any bank there had sought in two years.

“It spooked a lot of people,” Ely said. “Some of these European banks are having some serious funding problems.”

Officials from the Treasury, the Federal Reserve and other regulatory agencies are concerned that U.S. branches of European banks will try to borrow money here and ship it back to Europe, Ely said. And there is the broader worry of the impact of European banking problems on the interconnected global financial system.

“It’s like the contagion effect, with the European-centered liquidity problems spilling over into the U.S. financial system,” he said.

European banking problems and the sovereign debt crisis have become intertwined because the banks there hold so much of the debt of troubled European nations, Veron said.

“My sense is the Fed and the Treasury are very aware of the interconnectedness and the contagion risk, but they don’t have leverage,” he said. “Ultimately, this is a situation that belongs to the Europeans, and only they can resolve it.”

jim.puzzanghera@latimes.com

Times staff writer E. Scott Reckard contributed to this report.