Shares in Dexia, a bank jointly based in France and Belgium, continued to fall Tuesday, despite assurances from the governments of both countries that they would prop up the lender.
And the Royal Bank of Canada sought to reassure investors that it was "business as usual" at its joint venture with Dexia.
Dexia’s stock was down as much as 40 per cent but recovered enough to finish trading on the Frankfurt exchange with a loss of 20 per cent. It was the second day of sharp losses, despite promises by the two governments to insure its deposits.
"The government will take its responsibility for the continuation of the bank," said Yves Leterme, Belgium's caretaker prime minister.
He said Belgian and French authorities were in discussions to see how they can "cooperate in solidarity as shareholders to lead Dexia through this tough time."
Dexia's directors called an emergency meeting Tuesday, a day after its stock began to fall in the wake of a warning from ratings agency Moody’s that it might downgrade the bank’s creditworthiness because of mounting difficulties it was facing in getting short-term lending from other banks.
After the meeting, Dexia's directors issued a statement ordering the bank's management to take steps, in consultation with the Belgian and French governments, "to resolve the structural problems weighing on the group's operational activities and offer new growth prospects."
RBC Dexia shielded from parent's problems
Dexia and RBC announced in early 2006 they were combining their institutional investor services businesses, advising and managing large investment accounts such as pension funds. At the time, the joint venture had $2 trillion US under management.
"Dexia’s position has no impact on RBC Dexia or its operations," RBC said in a statement.
"RBC Dexia’s shareholder agreement is structured to prevent conditions at either parent company from impairing RBC Dexia’s ability to operate as a strong, independent company."
"RBC Dexia is not a wholly owned subsidiary of Dexia. Dexia has a 50 per cent equity interest in RBC Dexia; however, this does not entitle Dexia to access RBC Dexia assets or that of RBC Dexia's clients," RBC said.
Analysts at London-based Barclays Capital said they did not expect Dexia's changes to have much effect on the joint venture.
"While Royal faces the prospect of a potential new partner in the venture, we do not believe that the restructuring at Dexia will result in any disruptions in the JV's operations," it said.
Break-up could be opportunity for Royal
In fact, Barclays said, Dexia's problems could become an opportunity for RBC.
"What becomes interesting in the discussion of a potential break-up and sale of Dexia's operations is whether or not Royal would be interested in bidding for any of the business units that may come up for sale."
Before the financial crisis in 2008, Dexia was the biggest global lender to municipalities. But following the failure of Lehman Brothers, it was bailed out by its biggest shareholders and the governments of Belgium, France and Luxembourg with more than €6 billion.
There has been speculation the bank will be split up with support from the French and Belgian governments — both of which have stakes in the bank following the 2008 bailout.
One option would be to isolate its bad loans — totaling €100 billion ($141 billion Cdn) — in a "bad bank," which would be propped up by the proceeds from selling off its healthy parts, including the joint venture with RBC, according to reports in the newspapers De Standaard and De Morgen.
Dexia, which was founded in 1856, is heavily exposed to Greek debt and in its second quarter reported the biggest loss in its history, of €4 billion ($5.6 billion Cdn), after marking down the value of loans it had made to Greek borrowers.
But investors remain concerned about whether Greece will default soon, devaluing the loan portfolios held by European banks, making them unwilling to lend to each and creating a general squeeze on business and consumer credit.