Banks – The European financial crisis took an unexpected turn on Friday, with bank stocks plummeting.
Investors had a part, acting on their residual fears of prior bank crises extending throughout the sector.
The European Stoxx Europe 600 Banks index measures the performance of the top 42 European and British banks.
It ended 3.8% lower.
Despite this, the index has fallen almost 18% from its peak in late February.
Similarly, the FTSE 100 index in London fell 1.3%.
Shares of Deutsche Bank (DB) plummeted 14.5% before recovering to settle down 8.5%.
The shares of UBS and Credit Suisse fell 3.6% and 5.2%, respectively.
In recent days, Deutsche Bank’s expenses for safeguarding itself against a potential debt default have risen.
The bank’s five-year CDS touched 203 basis points on Thursday, according to S&P Market Intelligence data, the highest level since early 2019.
German Chancellor Olaf Scholz stated on Friday that there was no cause to be apprehensive about Deutsche Bank.
“It’s a very profitable bank,” said Scholz.
In Brussels, EU leaders released an united statement praising the European banking system for its stability and adequate capital and liquidity levels.
CMC Markets’ chief market analyst, Michael Hewson, confirmed 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.”
Interest rate hike
Last week, the European Central Bank maintained its promise to raise interest rates by half a percentage point.
Their decision was based on their belief that inflation was a more serious economic danger than the current global financial crisis.
The Bank of England hiked its main interest rate by a quarter percentage point on Thursday, following data indicating an unexpected uptick in inflation in February.
According to Susannah Streeter, Hargreaves Lansdown’s head of money and markets, market worries have also played a role.
“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.”
Experts think Deutsche Bank’s Friday news that it will repay one of its bonds five years early shook markets.
Investors often view such a move as confirmation that the company is financially sound and capable of repaying creditors on time.
US crisis effect
Investors were originally enthusiastic, but the failures of Silicon Valley Bank and Signature Bank in the United States, as well as Credit Suisse’s emergency takeover, eroded their trust.
Investors may have interpreted the statements as Deutsche Bank’s concern about the future of the banking industry.
According to Capital Economics deputy chief markets economist Jonas Goltermann, some investors are concerned that banks are overcompensating.
He also said that the bank’s activities appeared to have backfired.
According to a source close to the issue, Deutsche Bank’s decision to repay the bond ahead of schedule was not a reaction to recent market developments.
The bond would have lost its eligibility as a type of regulatory capital later on under the rules adopted in the aftermath of the 2008 financial crisis.
According to the source, the bank replaced the bond in February by issuing a corresponding type of bond.
Similarly, Commerzbank (CRZBF) in Germany and Société Générale in France suffered significant losses, with losses of 5.5% and 5.9% at the end of the quarter, respectively.
Swiss banks remain wary
In an emergency takeover negotiated by the Swiss government this week, UBS, Switzerland’s largest bank, paid 3 billion Swiss francs ($3.25 billion) for its Swiss rival.
After the failures of Silicon Valley Bank and Signature Bank earlier this month, the decision helped to calm markets.
On Friday, though, investors were apprehensive.
After a Bloomberg report that the US Department of Justice was examining their employees’ links to help Russian oligarchs avoid Western sanctions, UBS and Credit Suisse failed.
According to the narrative, the DOJ issued subpoenas to the people prior to UBS’s takeover of Credit Suisse.
In the meantime, staff of major American banks are being investigated.
According to Hewson of CMC Markets, the DOJ investigation into UBS contributed to broad price weakness across European banks.