Banks in Europe and Britain face another blow as petrodollar flows into the European banks will likely drop dramatically as oil price falls from its record peak.

Billions of dollars worth of funds from oil exporting nations have made their way into banks from Zurich to London in recent years.

These inflows helped banks withstand credit crisis losses and, given much of the money was in dollars, was a source of dollar liquidity during the recent money market difficulties.

Petrodollars also arguably fed the lending boom, while it lasted, and cushioned the effects when the boom turned to bust. But, with oil having tumbled to around $55 per barrel from almost $150 this summer and the mid-$90s a year ago, flows into European banks will likely drop dramatically.

What is more, a global recession and rolling financial crises mean that oil producers such as Russia and the Middle East states will have new calls to spend money at home, further diminishing the money available to grease the wheels of international banking.

Deposits abroad from oil producing countries hit $1.2 trillion (Dh4.4trn) at the end of 2007, according to the Bank for International Settlements, up from less than half a trillion in the third quarter of 2003.

More than $150 billion flowed into international accounts in 2007 alone.

Those flows will have continued to be strong in the first half of this year as oil soared, but would seem very likely to now be slowing and to diminish further so long as oil and the global economy struggle. Huge amounts of petrodollars flowed into US banks during the oil price spike of the 1970s, much of which was recycled into ill-fated floating rate loans into Latin America. That ended with the Latin American crises of the 1980s, causing a series of problems that now seem familiar, not least bank capital woes and the need for official intervention.

"This time around, petrodollars may have been deposited with European banks, which in turn lent aggressively to emerging market economies in all three time zones," Stephen Jen, currency strategist at Morgan Stanley in London wrote in a note to clients.

"Assuming this thesis is correct, sharply lower oil prices will constrain the recycling of petrodollars, and constrained risk-taking appetite of European banks could choke off loan flows into emerging Europe."

Jen also notes that European and British banks are five times more exposed to emerging markets through bank debt that their US and Japanese peers.

For some countries that have benefited from petrodollar banking flows there is another problem that their diminution will make worse; the banking sector is just really huge in relation to the size and wherewithal of the host economy.