Investors’ concerns that regulators and central banks have yet to manage the greatest shock to the industry since the 2008 global financial crisis caused shares of Germany’s largest bank, Deutsche Bank, to fall on Friday.
Despite assurances from policymakers that the global banking system is secure, broader indicators of financial market stress were also flashing, including a decline in the value of the euro relative to the dollar, a decline in the yields on euro zone government bonds, and an increase in the cost of insurance against bank defaults.
The Financial Stability Oversight Council, which is made up of the chiefs of several U.S. regulators, agreed at a meeting on Friday that the U.S. banking system is “sound and robust,” according to the U.S. Treasury, in the latest effort to reassure investors.
The conference was presided over by Janet Yellen, the U.S. Treasury Secretary, whose remarks will be extensively scrutinized by markets to gauge how far the government will go to support the banking industry following the failure of Silicon Valley Bank and Signature Bank earlier this month.
Germany’s Deutsche Bank earlier in the day came under scrutiny from investors and fell 8.5% along with a substantial increase in the cost of insuring its bonds against the danger of default. The top European bank share index finished with a 3.8% decline.
“The market is suspicious, or weary is maybe a better way to put it, that there are more problems out there that have come forth,” said Joseph Trevisani, senior analyst at FXstreet.com.
“It takes time. It’s going to have to be weeks without any problems in the banking system before markets will be convinced that it’s not a systemic problem.”
Banking analysts emphasized the distinction between Deutsche Bank and Credit Suisse AG, noting that the German bank had strong fundamentals and profitability while Credit Suisse needed the help of its larger Swiss rival UBS AG.
Deutsche is “NOT the next Credit Suisse,” according to research firm Autonomous, while JPMorgan analysts said “we are not concerned” and that the company’s fundamentals are “strong.”
Given that Credit Suisse does not project profitability for 2023, Paul van der Westhuizen, senior strategist at Rabobank, referred to Deutsche’s profitability as the “essential difference” between the two European banks.
“It’s a very profitable bank. There’s no reason to worry,” German Chancellor Olaf Scholz also said.
Yet, according to statistics from S&P Market Intelligence, shares of Germany’s largest bank have lost a fifth of their value so far this month, and the price of its five-year credit default swaps (CDS), a type of insurance for bondholders, increased to a four-year high on Friday.
According to financial data provider Ortex, short sellers have earned almost $100 million on paper bets on Deutsche Bank stock during the past two weeks.
Deutsche Bank opted not to respond.
Before some bank stocks recovered, worries from Europe spread to the US. Bank of America increased 0.6% and JPMorgan Chase & Co. declined 1.5%.
With PacWest Bancorp gaining more than 3% and First Republic Bank losing 1.4%, the S&P 500 regional banks index increased by 1.75 percent.
More selling pressure was exerted on European banks’ Additional Tier 1 (AT1) debt, a $275 billion market of bonds that can be written off during rescues to minimize the costs of bailouts falling on taxpayers.
The Swiss regulator decided that Credit Suisse’s AT1 bonds with a notional value of $17 billion will be wiped away as part of the agreement with UBS, shocking the world’s credit markets.
Unease has persisted despite statements made this week by authorities in Europe and Asia that they would keep prioritizing bondholders’ losses over shareholders’ losses.
“The developments in the AT1 market mean that most European banks are incentivized at this point to issue common equity, which is diluting for shareholders and also the reason why banking stocks are being reset lower,” said Peter Garnry, head of equity strategy at Saxo Bank.
According to a source familiar with the situation who spoke to Reuters, Italy’s UniCredit is inclined to return a perpetual bond as soon as possible in June in an effort to demonstrate that it has sufficient capital while controlling funding costs. A UniCredit representative declined to comment.
Despite the market turbulence, European decision-makers defended their nation’s banks, with German Chancellor Scholz, French President Emmanuel Macron, and European Central Bank President Christine Lagarde all stating that the system was secure.
Government officials have emphasized that the current financial chaos is distinct from the global financial crisis of 15 years ago since banks are better capitalized and funds are more readily available.
But, the concerns swiftly spread, and UBS was pressured into acquiring Credit Suisse on Sunday when its Swiss rival lost the confidence of investors.
The transaction, according to brokerage firm Jefferies, would alter UBS’s equity strategy, which was predicated on a lower risk profile, organic growth, and good capital returns.
“All these elements, which is what UBS shareholders bought into, are gone, likely for years,” it said.
(Adapted from Reuters.com)
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