Swedbank and SEB of Sweden, both of which are exposed to the economic crisis in the Baltic states, shed 15.9 and 11 percent respectively on Wednesday.
Nordea was down 5.2 percent and Handelsbanken 4.0 percent while the Norwegian lender DnB lost 8.1 percent on the day.
As of noon on Thursday, however, Swedbank shares were up 3.5 percent on the day, while SEB shares have gained nearly 2 percent in morning trading.
The Latvian treasury failed on Wednesday to sell its debt at a public auction, according to a statement to the stock exchange, increasing speculation of a possible devaluation of the lat.
Such a move would make repayments by Latvian lenders to Swedish banks more expensive, thereby increasing default risks.
The auction failure “increases the likelihood that the Latvian government will be forced to devalue its currency, and that of course would hit the banks,” said Öhman bank analyst Francis Dallaire, cited by Dow Jones Newswires in Stockholm.
Despite such speculation Latvian Prime Minister Valdis Dombrovskis ruled out a devaluation for social reasons.
“The devaluation solution is even more painful than the solution to cut the budget,” Dombrovskis told Latvia’s Diena daily.
“Now we’re discussing how we can protect the pensioners and others because a devaluation would affect every layer of the society simultaneously.”
A Baltic nation of 2.3 million, Latvia warned on Monday that its economy was set to contract by 18 percent this year — the worst in the 27-member EU — and overspending will soar to 9.2 percent of output, despite deep spending cuts.