Crisis spreading to German banks?

Banks across the eurozone are resilient, stable and strong, European Union (EU) leaders stressed on March 24 at the end of a two-day summit at their headquarters in Brussels, Belgium.

The EU officials' reassurance came as shares of Deutsche Bank, Germany's largest commercial bank, fell sharply while CDS (credit default swaps - reflecting the cost of insurance to protect against default) indexes surged.

Shares of the German bank, listed in Frankfurt, fell as much as 14% at one point during the session but pared their losses, closing down 8.6% on the afternoon of March 24.

Notably, March 24 was the third consecutive day that Deutsche Bank shares fell, and have lost more than 20% of their market value over the past month. Meanwhile, the CDS index rose to 200 points - the highest level since the bank encountered difficulties in 2019.

Shares of other European banks, such as UBS, Commerzbank, Société Générale and BNP Paribas, also fell, but to a lesser extent.

Contagious effects

Financial markets continue to be rocked by persistent turmoil since the collapse of Silicon Valley Bank (SVB) - the largest US bank to fail since 2008, and the Swiss government -brokered takeover of Credit Suisse by UBS earlier this month.

Despite repeated assurances from policymakers, investors continue to show clear signs of anxiety and uncertainty, pushing stocks into unpredictable ups and downs.

Concerns spread further among investors when the US Federal Reserve (Fed) tightened monetary policy on March 22.

Finance - Banking - Is the crisis spreading to German banks? — The chart shows the movement of CDS index - a measure of default risk - over 5 years (2018-2023). Source: Bloomberg

Deutsche Bank has reported 10 consecutive quarters of profit, after completing a multibillion-euro restructuring that began in 2019 aimed at reducing costs and improving profitability. The German bank is forecast to post annual net income of 5 billion euros ($5.4 billion) in 2022, up 159% from 2021.

Deutsche Bank's equity tier 1 (CET1) capital ratio - a measure of a bank's solvency - stood at 13.4% at the end of 2022, while its liquidity reserve ratio was 142% and its net stable fund ratio was 119%. These figures suggest that there will be no concerns about the German bank's solvency or liquidity position.

German Chancellor Olaf Scholz, speaking at a press conference in Brussels on March 24, said Deutsche Bank had “thoroughly restructured and modernized its business model, and is a highly profitable bank,” adding that there were no grounds for doubt about its future.

Reminder

Markets pared losses after European Central Bank (ECB) President Christine Lagarde told EU leaders that the eurozone banking sector was resilient thanks to strong capital, liquidity positions and post-2008 reforms. She also said the ECB was equipped with a toolkit to provide liquidity to the financial system if needed.

However, Moody's said in a note on March 22 that in an uncertain economic environment and with investor confidence still fragile, there is a risk that policymakers will not be able to prevent the current turmoil without causing more serious and long-term consequences within and outside the banking sector.

Finance - Banking - Is the crisis spreading to German banks? (Figure 2). — A branch of Deutsche Bank in Berlin, Germany. Photo: Getty Images

“Even before banking sector stress became apparent, we expected global credit conditions to weaken further in 2023 due to significantly higher interest rates and lower growth, including recessions in some countries,” the rating agency said.

Moody's suggests that, as central banks continue to try to rein in inflation, the longer financial conditions remain tight, the greater the risk that “stress will spread beyond the banking sector, causing economic and financial damage.”

Speaking of Deutsche Bank, the Wall Street financial adviser said this is not yet a banking crisis, as Deutsche's CDS spreads are well below the 1,000 points created by Credit Suisse's fall last week. But it is a reminder that rising interest rates have real implications for banks .

Minh Duc (According to CNBC, Euronews, EFinancialCareers)

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