LONDON (AFP) — The world's banks have found themselves in the eye of the financial storm lashing world markets as analysts struggle to pinpoint their exposure to the slumping US housing sector.
Markets in Europe and the United States staged a rebound on Friday, after a week of turmoil, as the US Federal Reserve acted to ease credit crunch concerns by cutting one of its key lending rates.
Since last month, with rising numbers of American households failing to meet their subprime mortgage repayments, global equities have tumbled in value with banks bearing the brunt of the share price falls.
Traders are worried that more and more banks and investment funds around the world will reveal the total extent of their losses from troubles in the US subprime or high-risk home loan sector, analysts said.
"It will take time for markets to assess the extent of the losses due to the decline in sub-prime markets," said Henk Potts, analyst at Barclays Capital.
"Until analysts have a much better understanding of the losses and their potential impact, (stock market) volatility will remain."
The crisis is centred in the United States but has global ramifications because many of the world's biggest financial institutions -- particularly in Europe -- hold complex financial instruments tied to subprime home loans.
These are known as mortgage-based securities are essentially high-stakes bets on US borrowers repaying their mortgages.
Global banks have seen their shares plunge amid fears of a credit squeeze -- a tightening of global lending conditions -- following a lengthy period of historically low borrowing costs.
"This entire period of economic expansion has been built on a vast amount of debt," said an analyst at brokerage Charles Stanley, Jeremy Batstone.
"Increase the cost of that debt, tighten loan conditions and one might be in for a bit more than just risk aversion," he added.
US investment bank Goldman Sachs last week said it had teamed up with other major investors to launch a three-billion-dollar (2.2-billion-euro) bailout of a hedge fund it manages.
Goldman said it was injecting the cash after the turbulence on the markets had a sharply negative effect on the fund's performance.
Earlier this month, French bank BNP Paribas suspended three of its funds amid concerns sparked by the crisis in the US subprime mortgage.
The funds held mortgage-backed securities, which the bank said it could no longer value because of a lack of liquidity in the market for them.
BNP's move followed a similar decision by the German mutual fund Union Investment which froze one of its funds that has exposure to the US subprime market.
Rising numbers of defaults by these borrowers have led to losses for many banks and investment funds -- and appetite for mortgage-backed securities linked to subprime loans has therefore dried up.
Richard Hunter, analyst at Hargreaves Lansdown stockbrokers, added that current uncertainty was likely to continue in global markets for the time being.
"Market volatility is going to continue until the extent of the problem is properly known.
"It may take a few weeks for positions to unwind and for banks to hold their hands up and reveal how much they are exposed."
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