Europe On The Brink. The biggest risk to the global commercial banking sector remains the European crisis, with the worst-case scenario of a euro bloc breakup looming large in the background, and the health of the global banking sector hanging in the balance. Our core global economic view is that the world is not about to enter a double-dip recession, but that weak ongoing growth leaves the global economy fragile, and thus susceptible to a major shock. A disorderly eurozone breakup would have devastating consequences for core eurozone banks, given their exposure to peripheral eurozone debt. Furthermore, with sovereign bond spreads soaring, commercial banks exposed to European debt are seeing their balance sheets erode, with the effect compounded by a weak economy hurting lending conditions. The market is discounting a negative outcome for bank asset value, with European and US bank shares trading well below book value. We stress that our core scenario for the eurozone is one of 'muddle through' rather than 'meltdown'. Furthermore, the exact path of events in the eurozone is difficult to predict, with potential outcomes including a full breakup of the monetary union, to austerity-induced recession, to European Central Bank support for the banking sector. However, it is worth looking at the potential contagion risks from a European financial crisis. Looking at the commercial banking universe covered by BMI, direct exposure to the weakest links in the eurozone is fairly limited, and is (unsurprisingly) most prevalent in European states. We are also acutely aware of the potential for contagion from a European financial crisis into emerging markets. However, looking at the data, emerging market exposure is mainly concentrated in Emerging Europe, as one would expect given the significant degree of banking sector integration across the continent over the past two decades. Furthermore, emerging markets tend to be exposed to the European banking sector on the liabilities side, far more than on the assets side (in other words, they are in danger of having European banks pulling lending from their economies). The following chart shows European banks' lending as a percentage of the destination country's GDP. Unsurprisingly, major financial centres figure prominently (eg Hong Kong, Singapore and the UK), as do emerging European economies. The accompanying chart draws upon Bank for International Settlements (BIS) data, and shows crossborder bank lending to the 'PIIGS'(Portugal, Ireland, Italy, Greece and Spain) as a percentage of commercial banking sectors' total foreign lending exposure. Here, core eurozone banking sectors including Germany and France's, and major developed markets such as the UK, are heavily exposed.