The UK FTSE 100 index was down 5.3% to 4715.76 by 0930 London time, with HBOS and Royal Bank of Scotland among the biggest losers. HBOS had fallen 16.1% to 168.1p and RBS was down 13.3% to 161.4p.
In the rest of Europe the story was much the same. France's Cac 40 index fell 5.2% to 212.31, with Dexia leading the plunge, down 11.3% to €7.57 and Axa down 9.5% to €20.90. And the Dax index in Frankfurt fell 5% to 5507.77, with Commerzbank (down 13.7% to €12.23) and Deutsche Bank (down 6.7% to €49.44) in the van.
The success of the $700 billion US market bailout bill, which passed a House vote on Friday evening, failed to restore investor confidence in the financial sector. The bill was rejected by the House of Representatives early last week, but a revised version, sweetened with $150 billion in tax cuts, passed first the Senate on Wednesday and then the House on Friday, both times with comfortable margins.
Meanwhile, in Europe, governments backed away from hints of a similar co-ordinated response, with many choosing instead to provide independent guarantees to depositors in their own banks. Following the lead set last week by France, Greece and Ireland, Denmark also announced that it would guarantee private savings without limit.
A meeting of the leading European economies - the UK, France, Germany and Italy - in Paris on October 4 called for lenient treatment of national governments' support for their own banks, which might otherwise fall foul of European anti-subsidy rules, rather than setting out plans for a Europe-wide effort. The summit also called for changes to accounting rules which would allow banks to reclassify parts of their portfolio from the trading to the banking book, a move which would ease the pressure on their regulatory capital holdings, and called for increased transparency in the credit default swaps market.
And the German chancellor, Angela Merkel, said in a press conference on Sunday that "we want to tell savers that their money is safe - the government guarantees that". She added that the government was also "doing everything it can" to put together another rescue plan for the troubled mortgage lender Hypo Real Estate after an earlier plan collapsed. A €35 billion liquidity facility was to have been provided by the government and a bank consortium, but the banks withdrew from their €8.5 billion commitment over the weekend.
See also: Bank of England extends eligible collateral for repo facility
Greece follows Ireland's lead in savings guarantees
Hope for markets as Senate rescues bailout
Failure of $700bn bailout sparks equity slump
The week on Risk.net, January 6–12Receive this by email