Why European governments dare not let banks fail

By Andrew Hurst, European Banking Correspondent - Analysis

ZURICH (Reuters) - Whatever their political hue, no European government has dared let a bank go bust since the outbreak of the subprime crisis.

That appears to be one of the lessons after Britain decided at the weekend to nationalise ailing mortgage lender Northern Rock and Germany drew up plans for a fresh bailout of stricken bank IKB.

Two factors have weighed heavily on governments and regulators in Britain and Germany -- the growing importance of financial services in a post-industrial economy and fear that a bank failure at the height of a global credit crisis could set off a cataclysmic chain reaction.

"When push comes to shove governments will intervene and support banks in a very major way," said Simon Adamson at CreditSights in London. "Banks cannot be allowed to fail especially when markets are in a fragile state."

The collapse of subprime mortgages set off a global credit crisis as banks around the world were forced to write down the value of their investments in complex securities whose value was wiped out as borrowers defaulted on their loans.

The credit crunch has hit banks in different ways, threatening IKB with collapse in July, as the value of its subprime investments wilted, and triggering the first run in 140 years on a British bank as customers besieged Northern Rock.

Switzerland's UBS has been the biggest casualty among Europe's global banks, taking more than $18 billion in writedowns on its subprime exposures in 2007, but has been able to line up a capital injection from Singapore and the Middle East without seeking help from the authorities.

"Although UBS's writedowns dwarf those of other banks, it can absorb them. It was not in the desperate situation of the Germans or Northern Rock," said Adamson.