Deutsche Bank tumbles German city of Frankfurt (AP) — In response to fresh market tremors caused by concerns about the global financial system, shares of Deutsche Bank sank dramatically on Friday, pulling down other significant European banks and prompting German Chancellor Olaf Scholz to express confidence in the nation’s largest institution.
After plunging as much as 14%, shares of Deutsche Bank finished down 8.5% on the German stock market. It was followed by a sharp increase in the price of credit default swaps, an insurance product that protects bondholders from a bank’s debt default.
A precursor to competitor UBS’s government-backed bailout of Swiss lender Credit Suisse was the increase in the cost of debt insurance. The hurriedly planned acquisition on Sunday tried to quell the turmoil in the world financial system caused by the failure of two U.S. banks and concerns over Credit Suisse’s ongoing problems, which caused its shares to crash and clients to withdraw their money.
When asked if Deutsche Bank may replace Credit Suisse, Scholz responded ?
“There is no need to fear.” Scholz stated during a European Union conference in Brussels that “Deutsche Bank has fully modernised and streamlined its operations and is a very successful bank.”
Similar to Credit Suisse, Deutsche Bank is one of 30 internationally prominent financial institutions, and due to the possibility of huge damages in the event of its failure, it is required by international regulations to maintain greater levels of capital reserves. Friday saw declines at other significant European banks, with Germany’s Commerzbank closing.5.45%, France’s Societe Generale off 6%, and Austria’s Raiffeisen down 7.9%.
The markets have been shaken by worries that other banks may have unanticipated issues similar to those that befell Silicon Valley Bank in the US, which collapsed after customers withdrew their assets and it suffered uninsured losses as a result of rising interest rates.
Depositors and investors withdrew, however, as the U.S. failures brought banks into unfavourable light and a significant Credit Suisse investor declined to contribute extra capital. The troubles at Credit Suisse, which included a $5.5 billion loss on transactions with a private investment fund, began before Silicon Valley Bank and Signature Bank failed.
Deutsche Bank has been profitable for 10 straight quarters under CEO Christian Sewing, including $6.1 billion last year. Before then, the bank experienced a lengthy period of low profitability and regulatory troubles dating back to the 2008 global financial crisis, which included a $7.2 billion punishment from US regulators for misleading buyers of complex mortgage-backed securities that later turned sour.
Despite the rebound under Sewing, the bank was “a natural candidate” for a market selloff because of its previous troubles, large, sometimes complex holdings and market skepticism about its future profits, said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management.
The market values the bank at less than the assets on its balance sheet, he said: “That means investors are still very worried about what are the risks that the bank has on its balance sheet or its earnings potential going forward, and that’s not good.”
Big global banks have sold off more than smaller ones in recent financial turmoil, he said.
“It’s contagion — it’s lack of confidence, a lack of trust,” Steffen said.
The selloff “might also be more emotionally driven, so to speak, rather than based on facts, but this is something that had to be expected” based on its history and performance after the global financial crisis, he said.
what is the Resion For Share Market Loss ?
Davide Oneglia at investment strategy research provider TS Lombard said it wasn’t surprising that “the next bank in the firing line is now Deutsche Bank.” It was associated with Credit Suisse in the past because of “managerial/strategic failures and involvement in many financial scandals” despite its recent profits.
“Whether this is just a reflection of investors’ anxiety at the end of a very stressful week, some technical market factor, or signs of more problems to come for the weakest European banks, it’s still too early to say,” he said.
However, the selloff of European bank shares “continues to appear more related to lack of confidence than fundamentals.”Stuart Graham and Leona Li, analysts at global financial research firm Autonomous, said that “Deutsche is in robust shape.”
“We are relatively relaxed in view of Deutsche’s robust capital and liquidity positions,” they said.Its holdings of derivatives — often complex investments whose value is based on other assets — are “well recognised” and “simply not that terrifying, in our opinion,” Graham and Li added. European authorities claim that banks governed by the European Union’s regulatory framework, which excludes Credit Suisse, are robust and have just a minimal connection to Credit Suisse and no direct exposure to Silicon Valley.
Efforts to strengthen banking regulation in recent years “puts us all in a position to say that European banking supervision and the financial system are robust and stable and that we have resilient capitalization of European banks,” Scholz said.
European leaders, who played down any risk of a possible banking crisis at a summit Friday, say the financial system is in good shape because they require broad adherence to tougher requirements to keep ready cash on hand to cover deposits.
International negotiators agreed to those rules following the 2008 global financial crisis triggered by the failure of U.S. investment bank Lehman Brothers. U.S. regulators exempted midsize banks, including Silicon Valley Bank, from those safeguards.
The reassurances, however, have not stopped investors from selling the shares amid more general concerns about how global banks will weather the current climate of rising interest rates.