Moody's Investors Service yesterday appeared to step back from a much-criticised decision to review several European banks believed to have been hit by the Asian financial markets crisis. Moody's, in what it said was a comment on recent rating actions on 10 banks in Germany, France and Britain, said East Asian markets were not likely to be of significant harm to the creditworthiness of most European banks in Europe. The embattled US credit rating agency said, however, the more general effect was likely to be negative. 'This exposure puts further strains on some of these banking group's fundamentals' and might result in a marginal deterioration of risk. Moody's said there seemed to be evidence that European banks, which had sought to expand quickly in Asia, had failed to properly weigh up the lending risks, and that smaller banks with less internal resources were likely to face pressure as a consequence of the crisis. Moody's warned it could still take fresh action against other banks, particularly if the ramifications of the crisis broadened. Last week, the ratings agency sparked anger when it announced it had put on negative review 10 European banks including five from France, four from Germany, and one - Standard Chartered Bank - from Britain. Moody's admitted that for most European banks, their East Asian and other emerging market activities represented only a small portion of their overall business, asset and funding base, which was still mainly skewed to their home market. It said, however, that European banking exposure had grown rapidly in recent years, as trade and financial relations between Europe and the region expanded. Moody's said that, according to the latest data from the Bank for International Settlements, the exposure of French and German banks to South Korea, Thailand, Indonesia and Malaysia was larger, on aggregate, than even banks from the US. 'Furthermore, the decision to expand activities in East Asian markets would fit naturally in the strategy of a large banking group with a diversified global franchise, although in many instances this expansion has been pursued more opportunistically, without due concern for an appropriate correlation between short-term returns and longer-term risks. 'In addition, European banks with more modest profitability and economic capitalisation have inherently less internal resources to weather out major international crises such as the current East Asia downfall.' Moody's said it was particularly looking at large credit exposures that might have been built up to Indonesia, Thailand, South Korea and Malaysia to corporate or financial institutions, as these were most likely to harm bank asset quality. 'Higher loan-loss provisioning should therefore depress recurring profitability and even deplete economic capitalisation, especially for those banks with more modest capitalisation.'