While problems in the US financial sector pose risks for the real economy, systemic risk to the payments system is not an issue. The US banking system has credible deposit insurance, so it is unlikely there would be any kind of run on the banks by depositors, and operationally the Fed can easily deal with it if it did happen.

In the UK, Northern Rock did have a run, but in the UK the BOE is there to provide funding as needed.

Not so in the eurozone where the ECB is prohibited from this type of action, and it’s up to the national governments to write the checks, and a major run on their banks has the potential to bring down the national governments.

European Banks May Write Down $81 Billion More, Merrill Says

by Poppy Trowbridge

(Bloomberg) Europe’s 11 largest banks may make additional writedowns of as much as $81 billion linked to U.S. subprime mortgages and have to cut dividends and raise money by issuing new equity, Merrill Lynch & Co. said.

“Banks are still playing catch-up on writedowns” following declines in the Markit ABX, CMBX and other indexes tied to subprime mortgages, Stuart Graham, a London-based analyst at Merrill, wrote in a note to clients today. “No bank has so far admitted to selling these assets off.”

In addition to writedowns from underperforming assets, lower profit means Europe’s banks will have to ease a cash shortage in the industry of as much as $104 billion, Graham wrote.

“We have assumed the European banks take significant further writedowns on” subprime mortgages, asset-backed securities, collateralized debt obligations and other derivatives, Graham said.

HSBC Holdings Plc, Europe’s biggest bank, HBOS Plc, Britain’s largest mortgage lender, Barclays Plc and Edinburgh-based Royal Bank of Scotland Group Plc are among banks that may make writedowns, Graham said. As many as eight banks may need to reduce their dividends by 20 percent and raise $84 billion in new equity.

The companies may also sell assets to raise money, he added.

–Editor: Ben Vickers, Adrian Cox