Amid the ongoing financial and banking crisis, Deutsche Bank reported a drop in its share value.
People in Europe are worried that the panic caused by the failure of two US banks and the quick takeover of the Swiss giant Credit Suisse may not be easy to stop because bank stocks have dropped sharply.
At one point on Friday, shares of Deutsche Bank fell by 14%, and other banks also had significant losses.
The FTSE 100 in London dropped 1.3%, and the stock markets in Germany and France dropped even more.
But what the US was afraid of did not come true.
Early in the day, the Dow Jones Industrial Average went down, but by the end, it had gone up 0.4%, the S&P 500 had gone up almost 0.6%, and the Nasdaq had gone up 0.3%.
Even though shares in big banks like JPMorgan Chase and Morgan Stanley were going down, the market went up.
Concerned European investors sold shares of banks like Germany’s Commerzbank, whose stock fell by about 5%. Societe Generale lost about 6% in the end, while Standard Chartered lost more than 6% and lost the most in the UK.
A massive loss for Deutsche Bank
Deutsche Bank came back from its most significant losses, but it was still more than 8% down at the end of the day.
Russ Mould, the investment director at AJ Bell, told the BBC that the drop in Deutsche Bank’s share price and the sharp rise in the price of insurance against a possible bank default showed “a wider loss of confidence in the banking sector.”
“People are beginning to worry that the central banks may have raised interest rates too much after keeping them too low for too long,” he said.
Central banks cut interest rates during the global financial crisis of 2008 and again when the pandemic hit in 2020 to help the economy grow.
But in the past year or so, the government has raised rates sharply to stop prices from increasing too quickly.
Because of these rate hikes, the value of the investments in which banks put some of their money has decreased. As a result, some US banks have closed because of this.
Share prices have decreased across the sector, and well-known investors say that this is a sign of deeper problems in the system and that there will be more trouble spots in the future.
Mr. Mould also said that higher interest rates have made it more likely that there will be a recession, and if that happens, “banks will usually have a pretty hard time.”
The government and central banks have been working to calm market worries.
Olaf Scholz, the German chancellor, defended Deutsche Bank at a news conference on Friday by saying that it had “completely reorganized and modernized its business model” and was “very profitable.”
Andrew Bailey, in charge of the Bank of England, also told the BBC that the UK banking system was “safe and sound.”
But the US government has sent mixed signals about whether or not they are willing to back all bank deposits. This has confused and dashed hopes that the area was getting back to normal.
On Friday, US Treasury Secretary Janet Yellen called together regulators for a meeting that wasn’t planned to discuss the financial system’s stability. Also, the Federal Reserve said that over the past week, more banks had used an emergency lending program for banks that the US central bank set up this month.
Bloomberg News also said that the US Department of Justice looked into whether UBS and Credit Suisse helped Russian oligarchs get around sanctions.
In the meantime, the failures have caused financial chaos, making it hard to know how much higher interest rates could go.
This week, Jerome Powell, the head of the Federal Reserve, said that the bank might raise interest rates less often if the banking panic keeps putting pressure on lending and slowing economic growth.
But on Friday, James Bullard, president of the Federal Reserve Bank of St. Louis, who is not on the rate-setting committee, said he thought the panic would end, leading to higher interest rates than the 5% expected now.
Joachim Nagel, the head of Germany’s Bundesbank, said that inflation is still very high and that central banks should keep raising rates.
He wouldn’t talk about Deutsche Bank, but he did say that market trouble was likely after Silicon Valley Bank and Signature Bank in the US failed and UBS bought Credit Suisse.
Is this as bad as the crisis in 2008?
There isn’t a problem that affects the whole system, like in 2008, when banks worldwide suddenly realized they had made bad investments in the US housing market.
This led to huge bailouts from the government and a worldwide recession.
Since then, banks have been told to keep more cash on hand, and rules about risk have become stricter. So, most experts think that the problems we have now won’t do too much harm.
Still, the world of banking is hard to understand. When the system is under stress, it can be hard to tell where new weaknesses might be. This happened when the government of Liz Truss surprised the markets with a new economic plan in September, and it’s happening again now with higher interest rates and less confidence.
Also, worries about banks’ health tend to spread quickly. If people start to worry about their deposits, they can move them with the click of a mouse.
Read Also: Credit Suisse investors fears heighten
Even if the trust doesn’t completely break down as it did during the financial crisis, regulators could make the rules even stricter, and banks could become less willing to lend.
This could slow down the world economy just when it needs a boost.