Federal Reserve is worried about European banks (UPDATES)

Remember the darkest days of 2008, when the big worry around the world was that the global financial system would freeze up? 

Well, step out of the time machine dear reader.

We may be approaching that dangerous territory again.

According to today's Wall Street Journal, the Federal Reserve is concerned that the euro zone debt crisis could "eventually hinder the ability of European banks to fund loans and meet other financial obligations in the U.S."

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The New York Fed — the regulatory body responsible for overseeing European banks in the U.S. — has been scrutinizing the U.S. operations of Europe's troubled banks, the Journal reports. 

Here's how the WSJ puts it in today's must-read story:

The Federal Reserve Bank of New York…recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures. The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say.

Officials at the New York Fed "are very concerned" about European banks facing funding difficulties in the U.S., said a senior executive at a major European bank who has participated in the talks.

Regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up. This time the worry is that the euro-zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations in the U.S. While signs of stress are bubbling up, the problems aren't yet approaching the severity of past crises.

U.S. stocks plunged on those latest contagion fears, as well as on new signs of weakness in the U.S. labor and manufacturing sectors. 

The S&P 500 dropped 5 percent, the Dow lost 4.4 percent, and the Nasdaq fell 5.7 percent. 

“I think the economic numbers, combined with further problems in the euro zone, is hitting a market that was prone to selling anyway, so fundamentally you are not getting good news,” Alan Lancz, president of Alan B. Lancz & Associates told the New York Times. 

“It is a situation where buyers have nothing to hang their hat on, and sellers have taken control once again,” Lancz added.

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