The banking crisis in Europe comes from increased worries over the global economy, moreover investors are troubled by homegrown issues as well

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A stock middleman speaks on the telephone at the Frankfurt stock exchange. MARTIN OESER/AFP/Getty Images

By Mark Scott

A cold wind is blowing from the City of London to the shores of Frankfurt’s Main River—and it has nothing to do with hibernate. Instead, the chill sweeping across the Continent’session financial capitals owes to Europe’s worsening economy, as analysts and policymakers revise downward their estimates for 2009 and banks come below renewed suspicion over the health of their balance sheets.

The devastation in just the past few days—especially in Britain—has been nothing short of breathtaking. On Jan. 19, British Prime Minister Gordon Brown unveiled a new program to provide banks with unlimited insurance against further multibillion-pound losses and a £50 billion ($73 billion) fund to purchase high-quality but illiquid securities. Yet if anything, the latest bailout plan seems merely to have made investors more skittish: Shares in giants such as Barclays (BCS) and the "new" Lloyds (LLOY.L), formed by the government-engineered merger of Lloyds TSB and Halifax Bank of Scotland (HBOS), have since tumbled through 40% and 56%, particularly.

Financial institutions on the Continent are also suffering from increased investor disquiet. Germany’s brave Deutsche Bank (DB) is off more than 27% since it announced on Jan. 14 that it would post an unexpected 2008 loss of $6.3 billion from winding down exposure to risky financial investments. France’s most prominent one bank, BNP Paribas (BNPP.PA), is down nearly 30% over the same conclusion. And but also Spain’session flourishing Santander (STD) is off 12% in the past week.

The common topic provoking the banking meltdown is increased worry over the European and global economy. To be surely, there are stationary concerns over exposure to bad American debt—everything from risky hedge funds to monies parked in the alleged pyramid cabal run by banker Bernie Madoff. But now, with European great domestic product in decline, unemployment rising, and market sentiment on the skids, investors are increasingly easily agitated about homegrown issues: the danger of local loan defaults, asset writedowns, and continued slothful lending.

"Last year, it was the banks that nearly brought down the economy. Now, it’session the economy that’s threatening the banks," says Pete Hahn, a fellow at City University’session Cass Business School in London and a previous frugal director at Citigroup (C). "We are no way near the bottom of this problem yet."

Nowhere is the spot worse than in Britain. Last October, British banks got a £50 billion (now $69 billion) money injection from the government. But now the country is entering its third part consecutive quarter of negative growth and most economists rely upon GDP to contract by at least 2% this year. Unemployment has jumped by the agency of pair percentage points, to 6.1%, over the last 18 months, home prices fell 16% in 2008, and consumer courage is at a 30-year low.