Banking stress puts US and Europe on watch for credit crunch

WASHINGTON/FRANKFURT : Stress in the banking sector is being closely monitored for its potential to trigger a credit crunch, a U.S. Federal Reserve policymaker said on Sunday, as a European Central Bank official also flagged a possible tightening in lending.

In the latest effort to calm investors, the U.S. Treasury said on Friday that the Financial Stability Oversight Council agreed that the U.S. banking system is"sound and resilient". He said it remained too soon to gauge the"imprint" bank stress would have on the economy and therefore too soon to know how it might influence the next interest rate decision of the Federal Open Market Committee .

Shares in Germany's largest bank fell 8.5 per cent on Friday and the cost of insuring its bonds against the risk of default jumped sharply and the index of top European bank shares fell. "Major central banks, including the Fed and the ECB, should make a joint statement that any further rate hike is off the table at least until stability has returned to the financial markets," Nielsen said in a note on Sunday.

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