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Dexia Makes U.S. Bank Stocks Look Good

NEW YORK ( TheStreet) -- The breakup of Dexia shows that there's even more uncertainty for European bank stocks than there is for most of the large, revenue-challenged U.S. banks.

The market seemed primed for a decent Columbus Day, as investors cheered the announcement by German Chancellor Angela Merkel and French President Nicolas Sarkozy that they would present a "comprehensive package" to solve the euro zone sovereign debt crisis, while propping up European banks. But the package is three weeks away, and Dexia agreed Monday to be broken up, with its Belgian banking business nationalized and the holding company left with a bond portfolio in run-off.

It sure sounds like it's 2008 across the water with surprise bank failure and bailout announcements over the weekend. Many remain uncertain which banks will acutally survive into the New Year.

For U.S. bank investors, however, there is at least some idea of how bad things can get.

Investors have already slammed the largest U.S. banks, with the KBW Bank Index (I:BKX) sliding 32% through Friday's market close, while Bank of America (BAC - Get Report) was down 56% year-to-date to $5.90, and Citigroup (C - Get Report) was down 48% to $26.02.

U.S. banks are facing revenue challenges in every facet of the banking business, as loan demand remains weak for most of the large players, who are also seeking to make up the revenue losses from the Federal Reserve's new rules limiting the interchange fees charged by banks to retailers to process debit card purchases.

It's too early to say how consumer behavior will change in the face of monthly fees for checking accounts that were formerly fee. Of course, for the time-being, deposit flight is not a problem for the large banks, since weak loan demand means there's no shortage of liquidity.

Banks area also facing narrowing net interest margins -- the "spread" between a bank's average yield on loans and investments and its average cost for deposits and wholesale borrowings -- as the Federal Reserve's "Operation Twist" has already pushed long-term rates lower, with short-term rates staying close to zero.

Another challenge faced by banks -- following a bruising battle with regulators -- is the Volker Rule -- part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Obama in July of last year -- which aims to eliminate most banks' proprietary trading operations, although key definitions still need to be ironed out. Based on federal regulators' draft proposal leaked last week, the banks will be putting in place elaborate and expensive compliance programs to comply with the new rules.

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