Shares in Deutsche Bank fell sharply Friday, dragging down other major European banks and leading German Chancellor Olaf Scholz to express confidence in the country’s largest lender after fears about the global financial system sent fresh shudders through the market.
Deutsche Bank shares closed down 8.5% on the German stock exchange after falling as much as 14%. That followed a steep rise in the cost to insure bondholders against the bank defaulting on its debts, known as credit default swaps.
Rising costs on insuring debt were also a prelude to Swiss lender Credit Suisse’s government-backed rescue by rival UBS. That hastily arranged takeover Sunday aimed to stem the upheaval in the global financial system after the collapse of two U.S. banks and jitters about Credit Suisse’s long-running troubles led its shares to tank and customers to pull out their money.
Asked whether Deutsche Bank could be the next Credit Suisse, Scholz said, “There is no reason to worry.”
“Deutsche Bank has thoroughly modernized and reorganized its business and is a very profitable bank,” Scholz said after a European Union summit in Brussels.
Like Credit Suisse, Deutsche Bank is one of 30 globally significant financial institutions, with international rules requiring it to hold higher levels of capital reserves because its failure could cause widespread losses.
Other major European banks also fell Friday, with Germany’s Commerzbank closing down 5.45%, France’s Societe Generale off 6%, and Austria’s Raiffeisen down 7.9%.
Markets have been rattled by fears that other banks may have unexpected troubles like U.S.-based Silicon Valley Bank, which went under after customers pulled their money and it suffered uninsured losses because of higher interest rates.
Credit Suisse’s troubles, including a $5.5 billion loss on dealings with a private investment fund, predated the collapses of Silicon Valley Bank and Signature Bank, but depositors and investors fled after the U.S. failures focused less-friendly attention on banks and a key Credit Suisse investor refused to put up more money.
Deutsche Bank has turned in 10 straight quarters of profit, including 5.7 billion euros ($6.1 billion) last year, improving its fortunes under CEO Christian Sewing.
Before that, the bank went through a long stretch of low profitability and troubles with regulators going back to the 2008 global financial crisis, including a $7.2 billion penalty from U.S. authorities for misleading buyers of complex mortgage-backed securities that later went sour.
Despite the rebound under Sewing, the bank was “a natural candidate” for a market selloff because of its previous troubles, large, sometimes complex holdings and market skepticism about its future profits, said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management.
The market values the bank at less than the assets on its balance sheet, he said: “That means investors are still very worried about what are the risks that the bank has on its balance sheet or its earnings potential going forward, and that’s not good.”
Big global banks have sold off more than smaller ones in recent financial turmoil, he said.
“It’s contagion — it’s lack of confidence, a lack of trust,” Steffen said.
The selloff “might also be more emotionally driven, so to speak, rather than based on facts, but this is something that had to be expected” based on its history and performance after the global financial crisis, he said.