What is happening at Deutsche Bank? Stocks fall amid fears of further deepening of banking crisis

Deutsche Bank shares fell sharply on Friday, dragging down other major European banks and leading German Chancellor Olaf Scholz to express confidence in the country’s biggest lender after fears about the global financial system rose in fresh moves through the market. Shiver sent.

Deutsche Bank shares were down 8.8% on the German Stock Exchange after falling as much as 14% in late afternoon trading. This was followed by a steep increase in the cost of insuring bondholders against a bank defaulting on their loans, known as a credit default swap.

Rising costs on loan insurance were also a prelude to the government-backed rescue of Swiss lender Credit Suisse by rival UBS. Credit Suisse’s long-running troubles sent its shares plummeting on Sunday as customers pulled out a hasty takeover aimed at stemming turmoil in the global financial system after the collapse of two US banks. .

Asked whether Deutsche Bank could be the next Credit Suisse, Scholz said, “There is no reason to worry.”

“Deutsche Bank has completely modernized and restructured its business and is a very profitable bank,” Scholz said after an EU summit in Brussels.

Like Credit Suisse, Deutsche Bank is one of 30 banks that are considered globally important financial institutions, so it is required by international regulations to hold high levels of capital reserves as its failure could result in widespread losses. Is.

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 jittery over fears that other banks could suffer unexpected trouble like US-based Silicon Valley Bank, which went under after customers pulled their money and suffered uninsured losses due to high interest rates.

Credit Suisse’s troubles, including a $5.5 billion loss on a transaction with a private investment fund, preceded the US collapse of Silicon Valley Bank and Signature Bank, but depositors and investors fled after US failures, banks and a major Less-favorably focused on Credit Suisse Investor. Refused to pay more.

Deutsche Bank has posted profits for 10 straight quarters, including 5.7 billion euros ($6.1 billion) last year, showing an improvement in its fortunes under CEO Christian Sewing.

This was preceded by a long period of low profitability and troubles with regulators in the 2008 global financial crisis, including a $7.2 billion fine from US authorities for misleading buyers of complex mortgage-backed securities that later soured. Went.

Despite rebounding under Stitch, the bank was “a natural candidate” for a market selloff because of its past troubles; large, complex holdings; And the market is skeptical about its future profits, said Sascha Steffen, professor of finance at the Frankfurt School of Finance and Management.

He added that the market values ​​the bank less than the assets on its balance sheet.

“It means that investors are still very concerned about what the risks are to the bank’s balance sheet or its earnings potential going forward, and that’s not good,” Stephen said.

He said that in the wake of US failures and the Credit Suisse merger, large global banks have sold more than smaller banks.

“It’s contagion — it’s a lack of confidence, a lack of trust,” Stephen said.

The sell-off “may have been more emotionally driven, so to speak, rather than based on facts, but that is something to be expected” based on its history and performance following the global financial crisis, They said.

“There are still a lot of risks that we don’t understand, and this is what the market is discounting,” the professor said.

On the other hand, analysts Stuart Graham and Leona Lee at global financial research firm Autonomous said in a note that “Deutsche is in strong shape.”

“Investors are concerned about the health of the bank,” but “we are relatively relaxed given Deutsche’s strong capital and liquidity position,” he said.

The holding of derivatives—often complex securities whose price is based on other assets—is “well-known” and “not too scary in our view,” Graham and Lee said.

European officials say banks in the EU’s regulatory system – which does not include Credit Suisse – are flexible and have no direct exposure to Silicon Valley and much less to Credit Suisse.

Efforts to strengthen banking regulation in recent years “put us all in a position to say that European banking supervision and the financial system is strong 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 on Friday, say the financial system is in good shape as they face tough requirements to keep ready cash on hand to cover deposits. Extensive follow-up is required.

International negotiators agreed to those rules after the 2008 global financial crisis triggered by the failure of American investment bank Lehman Brothers. US regulators exempted medium-sized banks, including Silicon Valley Bank, from those safeguards.

However, the assurances have not stopped investors from selling off shares, amid more general concerns about how global banks will cope with the current environment of rising interest rates.

Although the higher interest rates that banks pay on deposits should increase their profits than they can earn, some long-term investments can rapidly lose value and lead to losses unless banks manage those investments. not take care to hedge.

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