- Natalie Sherman and Simon Jack
- BBC News
Shares of the banking sector across Europe fell sharply as concerns about the financial strength of the sector returned.
Share prices in Germany’s Deutsche Bank fell by 14 per cent at a point Friday, and other lenders saw big losses.
Investors were alarmed by the collapse of two US banks and the rapid takeover of Swiss giant Credit Suisse by rival UBS.
The performance of the three major US stock exchanges declined in the opening trades, and the decline was driven in part by the decline in the stock prices of financial companies, including Morgan Stanley, JPMorgan Chase and Goldman Sachs.
In Europe, the list of banks that witnessed a significant decline in their share prices includes the German Commercial Bank (Commerzbank) and the French Societe Generale Bank, whose share prices fell by about six percent. In the United Kingdom, Standard Chartered was the biggest loser, with its share price down more than 6 percent.
Ross Mould, chief investment officer at AG Bell, told the BBC that the drop in Deutsche Bank’s share price, and a sharp rise in the cost of insuring against default by the bank, was “indicative of a broader loss of confidence in the banking sector”. .
“There is a growing fear that central banks may have overdone their interest rate increases, leaving them too low for too long,” he said.
Central banks cut interest rates during the global financial crisis in 2008 and again when the coronavirus pandemic hit in 2020 as part of efforts to encourage economic growth.
But over the past year or so, banks have sharply raised interest rates in an effort to curb increases in higher rates.
These increases in interest rates hit the value of investments in which banks kept part of their money, and contributed to bank failures in the United States.
Stock prices fell throughout the banking sector, with major investors warning that the collapses are only symptoms of deeper problems in the banking system, as there are still other effects of the crisis that have not yet appeared.
Mold said higher interest rates raised the possibility of a recession, and if that were to happen, “banks will generally find it difficult to continue operating”.
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The collapse of the Silicon Valley bank helped cause the recent loss of confidence
Central banks and governments are trying to allay market fears.
German Chancellor Olaf Scholz defended Deutsche Bank at a press conference on Friday, noting that the bank had “comprehensively reorganized and modernized its business model” and was “extremely profitable”. Deutsche Bank shares recovered some of their losses in afternoon trading.
Bank of England Governor Andrew Bailey told the BBC: “The UK banking system is sound and safe.”
But conflicting messages from the US authorities about whether they are prepared to guarantee all deposits in banks has led to confusion. It appears that hopes of restoring calm in the banking sector were premature.
The Fed reported that use of an emergency lending program for banks that the central bank set up this month had increased over the past week.
Bloomberg News also reported that the US Department of Justice is investigating UBS and Credit Suisse on whether they helped the Russian oligarch avoid sanctions.
Joachim Nagel, head of the German Bundesbank, said that high inflation, which is still present, means that central banks must continue to raise interest rates.
Nagel declined to comment on Deutsche Bank, but said: “Market turmoil is to be expected after the failure of Silicon Valley Bank and Signature Bank in the US as well as the failure of UBS’ takeover of Credit Suisse.”
“In the weeks that follow such important events, the road is often difficult,” he added.
