With one bank down, markets are shrieking over who might be next. Some investors are not waiting to find out - European bank shares were hurled out of portfolios yesterday after Bear Stearn's collapse, many falling by as much as 10 per cent. But there was method to the selling, as there has been for months.

Investors are screening banks on three main criteria. Banks failing even one are seeing their share prices head south. First, does a bank have enough liquidity to stay solvent? That means looking at its funding mix, in particular its reliance on wholesale markets, and trying to work out whether mortal damage would be done to earnings if this source of capital dried up. This is where Bear tripped up, as did Northern Rock in the UK. It is also why Lehman Brothers and the Icelandic banks are under pressure. The second screen is capital. Royal Bank of Scotland and Barclays are being punished primarily because their core Tier 1 ratios are two of the lowest among European banks. That leaves investors vulnerable to capital raisings should financial conditions deteriorate.