Banks – On Friday, the European financial crisis took an unexpected twist, with bank stocks tumbling.
Investors had a role, acting on their lingering anxieties about previous bank crises spreading into the broader industry.
Stocks
The European Stoxx Europe 600 Banks index tracks the top 42 European and British banks.
It finished 3.8% lower.
Despite this, the index has dropped roughly 18% from its peak in late February.
Similarly, the London FTSE 100 index sank 1.3%.
Deutsche Bank (DB) shares fell 14.5% before rebounding to close down 8.5%.
UBS and Credit Suisse’s shares declined 3.6% and 5.2%, respectively.
Deutsche Bank
Deutsche Bank’s costs for protecting itself against a potential debt default have grown in recent days.
According to S&P Market Intelligence data, the bank’s five-year CDS hit 203 basis points on Thursday, the highest level since early 2019.
On Friday, German Chancellor Olaf Scholz declared that there was no need to be concerned about Deutsche Bank.
“It’s a very profitable bank,” said Scholz.
EU leaders issued a joint statement in Brussels applauding the European banking sector for its stability and proper capital and liquidity levels.
Michael Hewson, chief market analyst at CMC Markets, backed up the news, saying:
“The rising price of insuring CDS senior debt is weighing on Deutsche Bank, as well as other European banks, on concerns over the impact of rising rates on the wider economy and banks’ balance sheets.”
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Interest rate hike
The European Central Bank kept its commitment to hike interest rates by half a percentage point this week.
Their decision was based on their conviction that inflation posed a greater economic threat than the present global financial crisis.
After data showing an unexpected increase in inflation in February, the Bank of England raised its main interest rate by a quarter percentage point on Thursday.
Market jitters, according to Susannah Streeter, Hargreaves Lansdown’s head of money and markets, have also contributed.
“Worries about contagion are again rearing up even though more deposits appear to have been flowing into the German lender since the banking scare erupted,” she said.
“It is thought to have capital reserves well in excess of regulatory requirements.”
Analysts believe Deutsche Bank’s announcement on Friday that it will repay one of its bonds five years ahead of schedule jolted markets.
Such a move is typically interpreted by investors as proof that the company is financially strong and capable of repaying creditors on schedule.
US crisis effect
While investors were initially optimistic, the bankruptcies of Silicon Valley Bank and Signature Bank in the United States, as well as Credit Suisse’s emergency takeover, harmed their confidence.
Investors may have construed the comments as Deutsche Bank’s anxiety about the banking industry’s future.
Some investors, according to Capital Economics deputy chief markets economist Jonas Goltermann, are concerned that banks are overcompensating.
Furthermore, he argued that the bank’s actions looked to have backfired.
According to a person close to the situation, Deutsche Bank’s decision to repay the bond ahead of time was planned rather than a reaction to recent market events.
Under the rules enacted in the aftermath of the 2008 financial crisis, the bond would have lost its eligibility as a sort of regulatory capital later on.
The bank, according to the source, replaced the bond in February by releasing a matching type of bond.
Similarly, Commerzbank (CRZBF) in Germany and Société Générale in France incurred considerable losses, with losses of 5.5% and 5.9%, respectively, at the end of the quarter.
Swiss banks remain wary
UBS, Switzerland’s largest bank, paid 3 billion Swiss francs ($3.25 billion) for its Swiss rival in an emergency takeover arranged by the Swiss government this week.
The move helped to calm markets following the collapses of Silicon Valley Bank and Signature Bank earlier this month.
Yet, investors were concerned on Friday.
UBS and Credit Suisse failed following a Bloomberg report that the US Department of Justice was investigating their employees’ connections to help Russian oligarchs dodge Western sanctions.
The DOJ sent subpoenas to the individuals prior to UBS’s acquisition of Credit Suisse, according to the story.
Meanwhile, employees of major US banks are being examined.
According to CMC Markets’ Hewson, the DOJ probe into UBS contributed to widespread price weakening across European banks.
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