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European banks hit hard by subprime

It looks like European banks have been hit much harder by the subprime crisis than U.S. banks. Last week, UBS (NYSE: UBS) wrote off about $19 billion, and today we have news that Royal Bank of Scotland (NYSE: RBS) suffered an $11.7 billion loss. We haven't seen numbers like that in the U.S. and this may be a story that needs to get more play. The European banking system is in far worse shape than the banks on our side of the Atlantic, and the impact that will have on global growth should not be underestimated.

Keep in mind that nothing like the FDIC or SIPC exists in Europe, so a major bank failure could be catastrophic for consumers. Banks have started tightening credit, and the once red-hot real estate sector has cooled, especially in places like Poland. I have friends who are in the real estate business in Eastern Europe and they say things have really slowed down.

Europe has already been hit with slowing growth, higher inflation, and high (relative) interest rates. Serious flaws in the banking infrastructure could result in a recession. Why don't we ever hear this?

For those worried about a real drawn-out slowdown in global growth, keep your eyes on the European banking system for a clue as to how long it could last.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/22/08.

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Last updated: May 18, 2008: 10:44 AM

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