Shares in Deutsche Bank and other major European banks fell sharply on Friday, as fears about the global financial system sent shudders through the markets. Deutsche Bank's shares tumbled 10.9% in early afternoon trading on the German stock exchange, following a steep rise in the cost to insure bondholders against the bank defaulting on its debts, known as credit default swaps.
The situation was exacerbated by rising costs on insuring debt, which was also seen as a prelude to a government-backed takeover of Swiss lender Credit Suisse by its rival UBS. The hastily arranged Credit Suisse-UBS marriage aimed to stem the upheaval in the global financial system after the collapse of two US banks and jitters about long-running troubles at Credit Suisse led shares of Switzerland's second-largest bank to tank and customers to pull out their money last week.
However, German Chancellor Olaf Scholz expressed confidence in the solidity of Deutsche Bank and reassured investors that there was no reason to worry. Scholz pointed out that Deutsche Bank has thoroughly modernized and reorganized its business and is a very profitable bank. The German lender has capital reserves well in excess of regulatory requirements and saw 10 straight quarters of profits. Last year, it made 5.7 billion euros ($6.1 billion) in after-tax profit.
Like Credit Suisse, Deutsche Bank is one of 30 banks considered globally significant financial institutions under international rules. As a result, it is required to hold higher levels of capital reserves because its failure could cause widespread losses. Other major European banks also fell on Friday, with Germany's Commerzbank down 7.5%, France's Societe Generale down 5.9%, and Austria's Raiffaisen off 5.9%.
The collapse of two US banks, Silicon Valley Bank and Signature Bank, as well as a $5.5 billion loss on dealings with a private investment fund, led to depositors and investors fleeing Credit Suisse. However, European officials say banks in the European Union's regulatory system are resilient and have no direct exposure to Silicon Valley and little to Credit Suisse.
Efforts to strengthen banking regulation in recent years have put the EU in a position to say that European banking supervision and the financial system are robust and stable, with resilient capitalisation of European banks. Europe's rules are stricter and clearer than in many other countries in the world, according to Scholz.
However, the reassurances have not stopped investors from selling shares amid more general concerns about how global banks will weather the current climate of rising interest rates. Though higher interest rates should increase bank profits by boosting what they can earn over what they pay on deposits, some long-term investments can sharply lose value and cause losses unless the banks took precautions to hedge those investments.