Luck Of The Wary.(World Affairs; FINANCE)(Europe's banking industry)

Byline: William Underhill

Caution helped a few Continental banks avoid subprime turmoil.

There are plenty of headlines touting the latest European victims of the subprime crisis. Earlier this month the Swiss banking veteran Marcus Ospel quit as boss of UBS after watching the bank's market value halve in the past year. Write-downs linked to the dodgy loans were one reason (together with a rogue trading scam) that France's second largest bank, Societe Generale, racked up a record fourth-quarter loss of $4.9 billion in 2007. The IMF warned recently that British banks will lose some $40 billion from the current turmoil. In all, North American and Western European banks lost $695 billion in value, more than the entire GDP of the Netherlands, according to new figures from the Boston Consulting Group.

Yet even as the hemorrhaging continues, a few nations have been strangely immune. Spanish and Italian banks, as well as some German ones, have been largely untouched by the financial virus. Profits at Banco Santander, Spain's largest bank, leapt 23 percent in 2007. Earlier this year Standard & Poor's raised its rating for BBVA, the country's second largest bank, to AA. S&P also concluded that the fallout from the subprime blowup on the Italian financial sector would have no more than a "marginal" impact. And while a few German banks have suffered losses, a recent Capital Economics report noted that total write-downs would amount to just 0.2 percent of the stock of German bank lending.

It would be nice to say that this immunity was born of superior foresight and stronger regulation, and there is some truth to that. Spain, for one, gave more thought than most to banking regulation. A near crash in the late '70s and early '80s following a slew of reckless loans to industry forced the central bank to stage a bailout and prompted an overhaul of the rules. In Spain, unlike the United States, many of the complex new financial products at the heart of the credit crunch--collateralized debt obligations and so on--can't be kept off the balance sheet. Major institutions are subject to continual scrutiny by officials. By contrast, Britain's regime looks relaxed at best. Since the collapse last year of Northern Rock--an early victim of the subprime crisis--it's emerged that the bank was due for a thorough audit by the Financial Services Authority only once every three years. Now under government ownership, Northern Rock owes $49 billion to the Bank of England.

But careful supervision is not the whole story.

The truth is that many of these banks were saved by a culture of caution. In Southern Europe, newfangled debt products backed by subprime loans never sold very well, and banks never pushed them. Recently the Bank of Spain commended the ...