Goldman Sachs may face legal action from German bank IKB and could be pursued by regulators in Germany and Britain after the U.S. investment bank was accused of duping clients.
Deutsche Bank and UBS led a 2 percent slide across European bank shares on Monday as investors feared regulators will probe deeper into past deals across the industry.
The U.S. Securities and Exchange Commission (SEC) charged Goldman on Friday over its marketing of a subprime mortgage product, igniting a battle between Wall Street's most powerful bank and the top securities regulator. Goldman has denied the charges.
Dusseldorf-based IKB nearly collapsed in 2007 and lost almost all of its $150 million in the Goldman mortgage securities product being probed by the SEC.
IKB said on Monday it was reviewing all of its financial transactions in the run-up to the crisis. The bank said it may consider taking possible legal steps, but had no grounds for action so far.
Britain and Germany said they could also pursue Goldman. The UK financial regulator said it was looking at the circumstances of the SEC's charges, as was Germany's BaFin, which said it was considering possible damage claims.
All this suggests you should not buy into a sector where the regulators are about to move the goal posts, said Bruce Packard, analyst at Seymour Pierce in London.
Even if they don't, the pitch surface is so uneven, that if the goal posts aren't moved, unfortunately we might see a few more broken legs in future.
The prospect of a wider probe unsettled investors across the sector.
By 1213 GMT the STOXX Europe 600 bank sector <.SX7P> was down 1.4 percent at 225.5 points, after falling as low as 224.1. The index reversed sharply late on Friday after the SEC's probe was announced, wiping out a 3 percent gain on the week.
Robert Khuzami, head of the SEC's enforcement division, said he was looking very closely at these products and transactions.
The SEC is investigating if deals arranged by other banks may have misled investors, and among the firms that created mortgage deals that soured were Deutsche Bank and UBS, the Wall Street Journal said.
Deutsche Bank was down 1.7 percent and UBS fell 2.8 percent.
The SEC has been asking banks for information about marketing of CDOs for some time, industry sources said, and it sent subpoenas to banks including Goldman and European rivals Deutsche Bank, UBS, Barclays and Credit Suisse , the Financial Times added.
Investors, ranging from banks to pension funds and local governments, lost billions of dollars on the complex structured products and many are considering legal action.
Royal Bank of Scotland was one of the few stocks to gain, rising 2.9 percent. RBS paid Goldman $840 million in August 2008 to unwind a position built up by ABN Amro, some of whose operations RBS had acquired, and could seek to claw back some of that payment if the SEC's case against Goldman succeeds.
Credit default swaps (CDS), which show the cost of insurance against default, widened for European banks after the charges against Goldman, traders said.
Five-year CDS on UBS was most volatile, widening by about 16 basis points to 98 basis points. Credit Suisse CDS was about 9 basis points wider at 83 basis points and Barclays CDS was about 4 basis points wider at near 90 basis points, according to data from Markit.
(Reporting by Steve Slater, Huw Jones, Jane Merriman and Clara Ferreira-Marques and Jonathan Gould and Edward Taylor in Frankfurt; Editing by Erica Billingham)