The stock of Germany’s largest bank, Deutsche Bank, fell by up to 14 percent on Friday as insuring against the bank’s insolvency became significantly more expensive. The rescue of Credit Suisse has not calmed investors, and banking sector stocks are falling across Europe.
Concerns about the stability of European banks remain high. Deutsche Bank’s stock has been cheapening for three consecutive days, and the bank has lost more than 20 percent of its value this month. The cost of insurance that protects creditors from the bank’s insolvency jumped significantly higher on Thursday evening, CNBC reported.
The collapse of Silicon Valley Bank and the emergency rescue of Credit Suisse by UBS has caused fear among investors that problems will spread to other banks. The Federal Reserve’s decision to raise interest rates on Wednesday further increased concerns.
Swiss and other regulators and central banks hoped that the sale of Credit Suisse to a domestic rival would help calm the markets. However, investors are far from convinced that banking sector tensions can be eased, and the situation can be brought under control.
Deutsche Bank’s AT1 bond prices also fell sharply. AT1 (Additional-Tier 1) is a type of bond created after the 2008 financial crisis to mitigate risks associated with such crises. However, a large portion of Credit Suisse’s AT1 bonds, which were considered safer, were written down.
Deutsche Bank has led the decline in the entire European banking sector at the end of this week. Germany’s second-largest bank, Commerzbank, lost 9 percent of its value, Credit Suisse, Societe Generale, and UBS fell more than 7 percent, and BNP Paribas fell 6 percent.
After a multi-billion euro restructuring in 2019, Deutsche Bank has been profitable for ten consecutive quarters. In 2022, the bank’s net profit reached a record €5 billion, an increase of 159 percent compared to the previous year.
The risk of infection is high
Financial regulators and governments have tried various measures to prevent a major banking crisis. On Wednesday, rating agency Moody’s said that they would probably succeed, but nothing is certain.
“The economic environment is uncertain, and investor confidence is fragile. There is a risk that politicians will not be able to contain the current crisis in such a way that long-term damage is not caused in the banking sector and elsewhere,” said Moody’s strategists.
“We were already expecting stress in the banking sector before it occurred, and we expect the global credit market to deteriorate in 2023 because interest rates are significantly higher, and economic growth is lower. In some countries, there is also an economic downturn,” they explained.
Moody’s pointed out that the longer central banks keep interest rates high, the greater the risk that banking sector stress will spread elsewhere, causing even more financial and economic damage.
Comment from Tavex’ analysts:
The decline in European banking sector stocks is not surprising. The crisis has been managed from a higher level, but the rapid decline in stocks clearly shows that investors’ attitude towards the endless policy of rescuing institutions is wavering. While previous measures have tended to reassure investors, what is happening this week shows that trust in the system is beginning to erode.
We expect this process to continue because it is clear that temporary measures deepen underlying problems (excessive debt levels caused by cheap money policies, misallocation of capital, taking excessive risks). Each rescue sends a message to other banks and financial institutions that no one will be left behind. This encourages poor and irresponsible risk management.
Higher interest rates are revealing the weaknesses and problems of the current system, which have been caused by low interest rates.