Frankfurt, March 24 (BNA): Shares in Deutsche Bank fell sharply Friday, dragging down major European banks and prompting German Chancellor Olaf Scholz to express confidence in the country’s largest lender after concerns about the global financial system sent fresh tremors to the market. . .
Deutsche Bank fell 8.8% in late afternoon trading on the German stock exchange after falling 14%. That followed a sharp rise in the cost of insuring bondholders against a bank default on its debt, known as default swaps, the Associated Press (AP) reported.
Rising debt insurance costs were also a precursor to the UBS-backed bailout of Swiss bank Credit Suisse. Sunday’s hastily arranged takeover aimed at stemming turmoil in the global financial system after the collapse of two US banks. Concern about Credit Suisse’s long-running woes sent its shares into treasuries and customers withdrawing their cash.
Asked if Deutsche Bank could be the next Credit Suisse bank, Schulz said, “You don’t have to worry.”
“Deutsche Bank has comprehensively modernized and reorganized its business and is a very profitable bank,” Schultz said after the EU summit in Brussels.
Like Credit Suisse, Deutsche Bank is one of 30 banks considered financial institutions of global importance, so international rules require it to maintain higher levels of capital reserves because its failure could cause widespread losses.
Other major European banks also fell on Friday, with Germany’s Commerzbank down 7.5%, France’s Societe Generale down 5.9% and Austria’s Raiffeisen down 5.9%.
Markets have been rocked by fears that other banks could run into unexpected problems such as the US-based Silicon Valley bank, which collapsed after customers withdrew their money and incurred uninsured losses due to rising interest rates.
Credit Suisse’s woes, including losing $5.5 billion in dealings with a private investment fund, predated the US collapses of Silicon Valley and Signature Bank, but depositors and investors fled after US failures focused less friendly attention on banks and a major Credit Suisse investor refused to offer more. from money.
Deutsche Bank has been profitable for 10 consecutive quarters, including 5.7 billion euros ($6.1 billion) last year, improving its fortunes under CEO Christian Swing.
Before that, it was a prolonged period of low profitability and troubles with regulators dating back to the 2008 global financial crisis, including a $7.2 billion fine from US authorities for misleading buyers of complex mortgage-backed securities that was later retracted.
Despite the boom under the tailor, the bank was a “natural candidate” for a sell-off in the market because of its past problems, its large and complex holdings, and market uncertainties about its future earnings, said Sascha Stephen, professor of finance at the Frankfurt School of Finance. administration.
He said the market values the bank at less than the assets on its balance sheet.
“It means that investors are still very concerned about the risks the bank faces on its balance sheet or its potential earnings in the future, and that’s not good,” Stephen said.
He said that the big global banks sold more than the smaller banks in the wake of the failure of the US and the Credit Suisse merger.
“It’s an infection — it’s a lack of confidence, a lack of confidence,” Stephen said.
He said the sale “may also have been more emotionally driven, so to speak, rather than fact-based, but that is something that should have been expected” based on its history and performance after the global financial crisis.
“There are still a lot of risks that we don’t understand, and this is what the market excludes,” said the professor.
On the other hand, Stuart Graham and Leona Lee, analysts at global financial research firm Autonomous, said in a note that “Deutsche is in strong shape.”
“Investors are concerned about the bank’s health,” they said, but “we are relatively comfortable given Deutsche’s strong capital and liquidity positions.”
Graham and Lee said its holdings of derivatives — often complex securities whose price depends on other assets — are “well-known” and “not too scary, in our opinion.”
European officials say banks in the EU’s regulatory regime – which does not include Credit Suisse – are resilient and have no direct exposure to Silicon Valley and little to no Credit Suisse.
Efforts to strengthen banking regulations in recent years, Scholz said, “put us all in a position to say that European banking supervision and the financial system are strong and stable and we have flexible capitalization of European banks.”
European leaders, who downplayed any risks of a potential banking crisis at Friday’s summit, say the financial system is in good shape because they need broad adherence to stricter requirements to keep cash on hand to cover deposits.
International negotiators agreed to those rules in the aftermath of the 2008 global financial crisis triggered by the failure of the US investment bank Lehman Brothers. US regulators exempted mid-sized banks, including Silicon Valley Bank, from those safeguards.
However, the reassurances did not deter investors from selling stocks amid more general concerns about how global banks will handle the current climate of rising interest rates.
Although higher interest rates should increase banks’ profits by boosting what they can earn for what they pay on deposits, some long-term investments can lose value severely and cause losses unless banks take precautions to hedge those investments.
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