Penticton Herald

Deutsche Bank shares drop as jitters over banks grow

FRANKFURT, Germany — Shares in Deutsche Bank fell sharply Friday, dragging down major European banks and leading German Chancellor Olaf Scholz to express confidence in the solidity of the country’s largest lender as fears about the global financial system sent fresh shudders through the markets.

Deutsche Bank shares tumbled 10.9 per cent in early afternoon trading on the German stock exchange. It follows 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 a government-backed takeover of Swiss lender Credit Suisse by its rival UBS.

The hastily arranged Credit Suisse-UBS marriage Sunday aimed to stem the upheaval in the global financial system after the collapse of two U.S. 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.

“There is no reason to worry,” Scholz said, responding to a reporter who asked whether Deutsche Bank could be the next Credit Suisse.

“Deutsche Bank has thoroughly modernized and reorganized its business and is a very profitable bank,” said Scholz, speaking after a European Union summit in Brussels.

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, so it is required 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 down 7.5 per cent, France’s Societe Generale down 5.9 per cent, and Austria’s Raiffaisen off 5.9 per cent.

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 under higher interest rates.

Credit Suisse’s troubles predated U.S. collapses of Silicon Valley Bank and Signature Bank, including a $5.5 billion loss on dealings with a private investment fund, but depositors and investors fled after the failures focused less friendly attention on banks and a key Credit Suisse investor refused to put up more money.

European officials say banks in the European Union’s regulatory system — which doesn’t include Credit Suisse — are resilient and have no direct exposure to Silicon Valley and little to Credit Suisse.

Efforts to strengthen banking regulation in recent years “puts us all in a position to say that European banking supervision and the financial system are robust and stable and that we have resilient capitalization of European banks,” Scholz said.

Europe’s rules are “stricter and clearer than in many other countries in the world,” the German leader added.

European leaders, who gathered Friday to gauge any risk of a possible banking crisis, say their banking system is in good shape because they require broad adherence to tougher requirements to keep ready cash on hand to cover deposits.

International negotiators agreed to those rules following the 2008 global financial crisis triggered by the failure of U.S. investment bank Lehman Brothers. U.S. regulators exempted midsize banks, including Silicon Valley Bank, from those safeguards.

The reassurances, however, have not stopped investors from selling the 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.

“For the moment, we see no reason to be worried,” Belgian Prime Minister Alexander De Croo told reporters on his way to the EU meeting. “But we monitor it really closely, almost on a daily basis, because no one knows what can happen.”

The European economy has been slowing rapidly since Russia invaded Ukraine 13 months ago to the day, leaving the EU flirting with recession. The war has fueled inflation by prompting cuts in supplies of previously abundant Russian oil, natural gas and coal and by denting consumer and business confidence.

The European Commission, the EU’s executive arm, expects economic growth in the 27-nation bloc to slow to 0.8 per cent this year from 3.5 per cent in 2022 and 5.4 per cent in 2021.

A projected rebound in growth to 1.6 per cent next year depends on a sound banking sector able to lend to businesses and consumers and protect deposits.

The EU has beefed up its regulation of financial institutions since the euro debt crisis.

Nonetheless, financial supervision in Europe remains a patchwork of EU and national authorities pursuing common approaches rather than heeding an actual single European rulebook.

For example, the euro area still lacks a common deposit insurance system, which is widely considered a key defence against future European bank crises.

On the market front, officials have said European banks generally have adequate cash buffers -while still urging vigilance.

“I am very confident in the amount of liquidity, the amount of resilience, that our banking system has built up,” said Ireland’s Paschal Donohoe, who leads the group of eurozone finance chiefs.

BUSINESS

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2023-03-25T07:00:00.0000000Z

2023-03-25T07:00:00.0000000Z

https://pentictonherald.pressreader.com/article/281676849161318

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