Deutsche Bank leads sell-off in European banks amid fears over contagion

Fears over liquidity at Deutsche Bank

Germany’s Deutsche Bank has led a sell-off in European banking shares amid mounting fears another bank could slip into trouble after the emergency merger of UBS and Credit Suisse last week. However, some strategists and investors cautioned that it might be a fear-induced sell-off, rather than having been triggered by concerns over liquidity at Deutsche.

Shares fall

Shares in the German bank fell as much as 14% before recovering some ground to end Friday down 8.6%. They have lost 28% since the start of the month. Europe’s Stoxx 600 banks index fell 4%, and the UK’s banking index fell more than 3%. In New York, the KBW bank index fell almost 2% in morning trading.

“Waves of bad news”

“Just as hopes had risen that contagion would be contained, banking stocks in Europe have been battered again by fears that fresh problems could be lurking,” said Susannah Streeter, the head of money and markets at Hargreaves Lansdown.“Waves of bad news keep hitting the banking sector and the tide doesn’t look like it’s set to turn any time soon,” she added.

“A bad vibe”

However, according to a portfolio manager at a large asset management firm, “a bad vibe” did not mean that there was a belief that Deutsche would suddenly topple. “I can’t see it – yet,” they said, adding that the “worry of contagion may become contagion itself”.

“Fundamentally modernised and reorganised”

Germany’s chancellor, Olaf Scholz, told reporters at a press conference: “Deutsche Bank has fundamentally modernised and reorganised its business and is a very profitable bank. “For many years now, we have taken very correct decisions with regard to the stability of our banks in Europe.”

Social media worries

Social media, a factor believed to have hastened the fate of Credit Suisse, was again awash with worries about Deutsche, homing in on charts showing a form of debt insurance called a credit default swap (CDS). If this spikes upward it can be an indication that investors believe that the entity behind the CDS is more likely to default on its debts.

“People have got themselves into a state of panic”

The flurry on social media illustrated a longstanding problem with confidence and markets, that “people have got themselves into a state of panic”, said a strategist at a large US insurer. “The dynamics of a bank run are always effectively Chinese whispers. It may prove a problem of pace rather than size,” he said.

UK banks affected

In London, banks led the UK’s blue-chip index lower, with Barclays and Standard Chartered down 6%, and and NatWest off 4%. They helped to drag the FTSE 100 down by 1.6%.

“Profound” implications for global banking regulation

Bill Winters, the chief executive of Standard Chartered, said earlier on Friday that the decision to wipe out $17bn (£13.9bn) of risky Credit Suisse debt as part of its rescue deal would have “profound” implications for global banking regulation.

Regulators and investors

The move spooked markets and prompted a sell-off in other bank debt earlier this week, as investors scrambled to assess whether the same could happen for their holdings of AT1 debt in other banks, a market worth more than $275bn. “I think it had very profound implications for the regulation of banks, and for the way that banks manage themselves,” Winters said, speaking at a financial forum in Hong Kong.

US bank failures

In the past two weeks, two US regional banks, California-based Silicon Valley Bank and New York’s Signature Bank, have collapsed because of heavy losses on their bond portfolios and a run on deposits by jittery investors. In the UK, HSBC moved to acquire the British arm of SVB in a £1 deal brokered by the government, after the biggest bank failure since 2008. Last week, Wall Street companies including Bank of America, Goldman Sachs and JP Morgan agreed a $30bn rescue deal to prop up the troubled mid-sized bank First Republic, although it may need further funding. Winters said there appeared to be “nonviable business models remaining, at least in the US”.

Credit: https://www.theguardian.com/business/2023/mar/24/european-bank-shares-fall-as-market-jitters-return-deutsche-bank-ubs-ftse-100

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