European and US Banking Stock Prices Highly Correlated

This is a graph of the banking industry stock price indexes in the US and Europe. While the problems are somewhat different in the US and in Europe, bank stocks have taken a beating on both indexes. The correlation of .78 suggests that the banks may interconnected such that a crisis in one area spills over to the other. US banks are not heavily invested in Greek bonds but they are heavily invested in French and German banks which are invested in Greek bonds as well as sovereign debt in other countries at risk. There is a reason why US spokespersons have been encouraging recapitalization of European banks.

One of our problems is that we don't know how Wall Street and European banks are interconnected through a variety of derivatives and hedging methods.