Deutsche Bank (ETR:DBKGn), Germany’s biggest bank, witnessed a massive drop in its shares on Friday as investors grew anxious over the failure of regulators and central banks to contain the worst sector shock since the global financial crisis of 2008. Wider financial market indicators were also showing stress, with the euro sinking against the dollar, euro zone government bond yields declining, and the costs of insuring against bank defaults surging. Policymakers had previously offered assurances that the global banking system was secure.
US Treasury to Reassure Investors In a recent effort to calm investors’ nerves, the US Treasury has confirmed that the US banking system is resilient and sound. The Financial Stability Oversight Council agreed during a Friday meeting, which is made up of various US regulators. Janet Yellen, the US Treasury Secretary, who chaired the meeting, had her comments monitored closely by the market for indications of how far authorities are willing to go to shore up the banking sector. The collapse of Silicon Valley Bank and Signature Bank (NASDAQ:SBNY) earlier this month has raised concerns.
Deutsche Bank Thrust into the Spotlight Earlier in the day, Deutsche Bank saw a sharp decline in its shares, tumbling 8.5%, along with a significant increase in the cost of insuring its bonds against the risk of default. This thrust the bank into the investor spotlight, and the index of top European bank shares ended 3.8% down. Market analysts have highlighted the difference between Deutsche Bank and Credit Suisse AG, which needed UBS AG to rescue it, stressing that Deutsche Bank had strong fundamentals and profitability.
Profitability Is the Fundamental Difference Autonomous, a research firm, affirmed that Deutsche Bank is “crystal clear” and “not the next Credit Suisse,” while JPMorgan analysts stated that they were not concerned and that Deutsche Bank’s fundamentals were “solid.” Paul van der Westhuizen, senior strategist at Rabobank, cited Deutsche Bank’s profitability as the “fundamental difference” between the two European banks. Chancellor Olaf Scholz of Germany added that “it’s a very profitable bank,” and there is no reason to worry.
Short Sellers Profit from Deutsche Bank’s Decline Despite these reassurances, Deutsche Bank’s shares have declined by a fifth this month, and the cost of its five-year credit default swaps (CDS) reached a four-year high on Friday, according to S&P Market Intelligence. Ortex, a financial data company, reported that short sellers had made over $100 million in paper profits by betting against Deutsche Bank stock over the past two weeks.
Dilution Concerns Affect European Banks Further selling pressure was exerted on European banks’ Additional Tier 1 (AT1) debt, a $275 billion market of bonds that can be written off during rescues to prevent the costs of bailouts from falling on taxpayers. The Swiss regulator decided as part of the deal with UBS that Credit Suisse’s AT1 bonds with a notional value of $17 billion would be wiped out, stunning global credit markets. Although authorities in Europe and Asia have said this week they would continue to impose losses on shareholders before bondholders, unease has lingered.
Policymakers Voice Support for European Banks Despite market volatility, European policymakers voiced their support for their continent’s banks. Germany’s Scholz, French President Emmanuel Macron, and European Central Bank Chief Christine Lagarde all said that the system was stable. Policymakers have stressed that the current turmoil is different from the global financial crisis of 2008, stating that banks are better capitalised and that funds are more easily accessible.
