Deutsche Bank leads slide in bank shares, default insurance at highest since 2018

London/Brussels: Bank stocks took a heavy hit on Friday, led by Germany’s Deutsche Bank, as policymakers struggled to calm nerves after failures on both sides of the Atlantic.

The Stoxx 600 banks index, which contains Europe’s biggest lenders, fell 3.6 percent by mid-afternoon, outstripping weakness in broad national indices. Deutsche Bank dropped 7.9 percent in Frankfurt and Commerzbank 5.6 percent as investor jitters over the financial health of bank stocks lingered in the market. France’s Société Générale lost 5.6 percent and Bank of Ireland fell 5.7 percent.

US banks were also under pressure at the Wall Street open, with the KBW Banking index down 2 per cent, and troubled regional lender First Republic Bank falling 0.5 percent.

Broader indices were dragged down by the renewed banking sector turmoil, with the S&P 500 and tech-heavy Nasdaq Composite off 0.2 percent and 0.4 percent respectively in early trade in New York.

The Euro Stoxx 600 was down 1.4 percent, Germany’s Dax fell 1.8 per cent, France’s Cac 40 slid 1.8 percent and London’s FTSE was 1.5 percent lower.

Bank stocks have had a turbulent March as traders fret over the financial hit that banks may take from central banks’ aggressive interest rate rises of the past year.

“Europe is very tilted towards banks, which have been in the eye of the storm,” said Emmanuel Cau, head of European equity strategy at Barclays. “There are bank-specific issues to worry about like regulation and deposit safety.”

Deutsche’s slide came after a surge this week in the cost of insuring the lender’s debt against default. The price of the bank’s five-year credit default swaps — derivatives that act like insurance and pay out if a company defaults on its payments — climbed from 134 basis points on Wednesday to 200bp on Friday, according to data from Refinitiv.

Global authorities have tried to assuage investors’ concerns after the failure of several US regional banks, and last weekend’s hasty takeover of Credit Suisse by its rival UBS.

German chancellor Olaf Scholz rejected comparisons between Deutsche Bank and Credit Suisse though a slump in the German lender’s shares sparked a further day of turmoil for the banking sector.

Speaking after Deutsche shares fell as much as 14 percent on Friday, the German chancellor sought to shore up confidence in the country’s biggest bank, with investors still nervous after the forced takeover of Credit Suisse last weekend.

“Deutsche Bank has fundamentally modernised and reorganised its business and is a very profitable bank,” German chancellor Olaf Scholz said, after being asked if the lender was the “new Credit Suisse”. “There is no reason to be concerned about it.”

He added that “the capitalisation of European banks is resilient, thanks to the work [we’ve put in] over the past few years and also thanks to the efforts of the banks themselves”.

European Central Bank president Christine Lagarde told a eurozone summit in Brussels that the banking sector was “strong” and that the ECB was fully equipped to provide liquidity to the euro area financial system if needed, according to an EU official.

She insisted there was “no trade-off” between controlling inflation and fostering financial stability. US Treasury secretary Janet Yellen on Thursday said regulators were “prepared to take additional actions if warranted” to ensure the safety of bank deposits. But efforts to stem the selling have so far had only fleeting effects.

Central banks in the eurozone, US and UK have all pushed ahead with interest rate rises to fight stubbornly high inflation this month, despite the banking sector turmoil, itself partly the result of rapidly increasing borrowing costs over the past year.

“There’s still a nagging question amongst market participants over whether the turmoil in the banking sector is over or if there will be wider contagion,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe.

“It is also now evident from central banks that the turmoil is not going to put a hard brake on their monetary policy actions — that’s sending jitters through markets because it might exacerbate or expose new vulnerabilities in the banking sector.”

Dirk Willer, strategist at Citigroup, said it was “too early to tell” whether banking sector stress would have an impact on the wider US economy. But he added that both the Federal Reserve and the ECB had “become more cautious” about tightening monetary policy. He predicted that the US was likely to enter a recession this year, noting that “the banking stress tightens credit”.

Economists are now anticipating that the Fed will pause its rate-raising cycle, keeping rates on hold at its next meeting in May before cutting in September, while anticipating a 0.25 percentage point rise from the ECB meeting and no cuts in 2023.

Like many of its European peers, Deutsche shares have fallen this year, losing more than a fifth of their value amid investor worries about rapidly rising interest rates and global financial stability. Concerns about the sector’s health have been heightened by Credit Suisse’s travails, as well as the collapse of Silicon Valley Bank in California and the struggles of other US regional lenders.