Deutsche Bank shares plummet as global fears over banks continue

Shares in Deutsche Bank have dropped. Credit: AP

By Multimedia Producer Rachel Dixon

Shares in Deutsche Bank plummeted on Friday, dragging down other major European lenders, as fears over a banking crisis continue.

Deutsche Bank shares were down 8.5% on the German stock exchange after falling as much as 14%.

This is the third bank in recent weeks to come into difficulty, which has caused anxiety in the banking world to linger. Silicone Valley Bank collapsed at the start of the month and failing Swiss lender Credit Suisse had to be taken over on Sunday.

But why has Deutsche Bank fallen into difficulty and will it see the same outcome as Silicone Valley and Credit Suisse?

What is Deutsche Bank?

Deutsche Bank is a German lender that has been operating since 1870.

Like Credit Suisse, it 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.

On Friday, as Deutsche Bank's shares dropped, other major European banks fell too, with Germany's Commerzbank closing down 5.45%, France's Societe Generale off 6%, and Austria’s Raiffeisen down 7.9%.

Why is Deutsche Bank in trouble?

Despite a rebound in recent years, the bank went through a long stretch of low profitability.

They also had troubles with regulators going back to the 2008 global financial crisis including a $7.2 billion (£5.9 billion) penalty from US authorities for misleading buyers of complex mortgage-backed securities.

The bank was “a natural candidate” for a market selloff because of its previous troubles, large, sometimes complex holdings and market scepticism about its future profits, said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management.

The market values Deutsche Bank at less than the assets on its balance sheet.

Mr Steffen 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."

The shares dropped on Friday after a steep rise in the cost to insure bondholders against Deutsche Bank defaulting on its debts, known as credit default swaps.

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.

A view of the Credit Suisse UK offices in Canary Wharf, London. Credit: PA

What has this got to do with the other troubled banks and fears in the financial world?

“It’s contagion - it’s lack of confidence, a lack of trust," Mr Steffen said.

The failures of Silicone Valley Bank and Credit Suisse have caused concerns over a potential banking crisis.

Markets have been rattled by fears that other banks may have unexpected troubles like US-based Silicon Valley Bank, which went under after customers pulled their money and it suffered uninsured losses because of higher interest rates.

After SVB collapsed on Friday, March 12, the worries quickly turned to embattled Credit Suisse last week.

This caused its share price to fall to its lowest level, prompting investors to sell shares in other banking stocks amid the panic.

The rising costs on insuring debt that Deutsch Bank has experienced was also a prelude to the Swiss lender's government-backed rescue by rival UBS.

That hastily arranged takeover on Sunday aimed to stem the upheaval in the global financial system but this does not seem to have worked.

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Will Deutsche Bank suffer the same fate and SVB and Credit Suisse?Asked whether Deutsche Bank could be the next Credit Suisse, German Chancellor Olaf Scholz said: “There is no reason to worry.”

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

European officials say banks in the EU's regulatory system - which does not 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,” Mr Scholz said.

European leaders, who played down any risk of a possible banking crisis at a summit Friday, say the financial system is in good shape because they require broad adherence to tougher requirements to keep ready cash on hand to cover deposits.

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.