Deutsche Bank’s Shares Drop Reignites Banking Sector Concerns, All You Need To Know

On Friday, Deutsche Bank’s share sharply declined on the German stock exchange, falling as much as 14 per cent at one point and finally closing 8.5 per cent lower

A sharp decline in shares of one of Germany's largest banks has renewed concerns in the financial market. On Friday, Deutsche Bank’s share sharply declined on the German stock exchange, falling as much as 14 per cent at one point and finally closing 8.5 per cent lower. 

This comes as the financial market is still trying to recover from the panic triggered by the collapse of two US banks and the rushed takeover of Swiss giant Credit Suisse. 

According to a report by BBC, London FTSE 100 closed on Friday down 1.3 per cent while stock markets in Germany and France had even greater declines. On the other hand on Wall Street, the Dow Jones Industrial Average and the S&P 500 both increased after dipping earlier in the day, while the Nasdaq concluded the day up 0.3 per cent.

Germany's Commerzbank, whose shares fell by around 5 per cent, was one of the European banks affected by a sell-off by uneasy investors. Societe Generale in France finished down about 6 per cent, while Standard Chartered in the UK was the largest loser, down more than 6 per cent, the report added. 

News agency Associated Press (AP) in a report said that Deutsche Bank’s share decline followed a sharp rise in the cost of ‘credit default swaps’, an insurance product that protects bondholders from a bank's debt default.

Increasing debt insurance costs were also a precondition to a government-backed buyout of Swiss lender Credit Suisse by rival UBS, the report added.

Last week, an abruptly planned takeover of Credit Suisse and UBS intended to calm as concerns about Credit Suisse's ongoing issues caused its shares to plunge and clients to withdraw their money. 

The conditions of UBS's acquisition of Credit Suisse startled the European banking sector, particularly the clause requiring the write-down of $17 billion in Credit Suisse bonds.

The bonds, also referred to as AT1s, are a crucial component of the capital of European banks. Banks are required by regulators to raise these funds in order to hedge against losses. Concerns about the possible spread of this provision throughout the entire European banking system have been raised. The action may discourage investors from purchasing these bonds from other banks, raising borrowing prices and further eroding the already precarious banking industry.

On March 24, Deutsche Bank made a redemption offer for a different kind of subordinated bond that is due in 2028 in an effort to ease market concerns over its debt. The bank pledged to purchase back the bonds for the full principal amount plus interest. Following the redemption offer, the price of these bonds increased. Notwithstanding the fact that this was beneficial to specific bondholders, it did little to calm worries about the stability of Deutsche Bank and the European financial sector.

When concerns about the global banking system sent new tremors through the markets, German Chancellor Olaf Scholz expressed confidence in the stability of the nation's largest lender.

According to AP, Scholz said, “there is no reason to worry. Deutsche Bank has thoroughly modernized and reorganized its business and is a very profitable bank.”

The report also added that the German lender has seen profits for 10 consecutive quarters and has capital buffers that well exceed regulatory standards. Like Credit Suisse, Deutsche Bank is one of 30 banks that international regulations deem to be internationally significant financial institutions. As such, it is required to maintain higher levels of capital buffers due to the possibility that its failure may result in considerable losses.

Fears that other banks could have problems similar to Silicon Valley Bank, which failed after customers withdrew their funds and it faced uninsured losses as a result of increased interest rates, have alarmed the markets.