Major European financial institutions such as Deutsche Bank ( DB , quote ) and BNP Paribas ( BNPQY , quote ) have sold off large chunks of sovereign debt from the continent as they scramble to cut risk exposure and raise cash.
A Financial Times article by Patrick Jenkins, Martin Stabe and Stanley Pignal discussed how Citigroup ( C , quote ) analysts discovered how three relatively small state-owned German banks -- LBBW, WestLB and NordLB -- were big writers of sovereign CDS protection, a form of insurance against default.
As the writers point out, these banks now look extraordinarily exposed to a disaster in the CDS space.
"Along with Austria's Volksbank, the three state-owned German banks were the largest players in that market relative to their capital bases, a potential issue in case there were sovereign defaults."
Meanwhile, giant banks are cutting exposure left and right.
The European Banking Authority reported the holdings of 65 financial institutions as part of a recent stress test . Most of those banks reported selling sovereign debt from euro zone members. The rest -- led by Spanish institutions -- actually increased their holdings.
BNP Paribas (BNPQY) sold the most, unloading roughly $10 billion in sovereign debt from Greece, Italy, Ireland, Portugal and Spain to raise cash. As of the end of September, BNP Paribas had $37 billion in European sovereign debt.
Deutsche Bank's (DB) $8 billion reduction was, by far, the biggest in percentage terms -- 66% of the German giant's exposure to the troubled fringe of Europe.
The question is whether these moves were enough to restore confidence in these institutions.
The European Banking Authority said BNPQY now has enough liquid reserves to sustain it through a euro disaster. But DB needs more, they say.