Deutsche Bank, Germany’s largest lender, saw a sharp decline in shares on Friday, which had a knock-on effect on other major European banks. The fall comes amid fears of weaknesses in the global financial system. Deutsche Bank shares dropped 14% on the German stock exchange. This followed a sharp increase in the cost of financial derivatives that insure bondholders against the bank defaulting on its debts. This rise in insuring debt was also seen before a government-backed takeover of Swiss lender Credit Suisse by its rival UBS.
Under international rules, Deutsche Bank is classified as one of 30 globally significant financial institutions. It must hold higher levels of capital reserves because its failure could cause widespread losses. The bank has seen shares tumble despite having capital reserves well above regulatory requirements and making ten straight quarters of profits. Other major European banks also fell, including Germany’s Commerzbank, France’s Societe Generale, Austria’s Raiffeisen, and the soon-to-merge Credit Suisse and UBS.
The fears stem from the collapse of two US banks and jitters about long-running troubles at Credit Suisse, which led to customers withdrawing their money last week. According to European officials, banks within the European Union’s regulatory system are strong. They do not have direct exposure to the failed US banks. Despite the reassurances from European officials that their banking system is in good shape, investors continue to worry about how global banks will fare amidst the current environment of rising interest rates. While higher interest rates are expected to boost bank profits, there is still concern about the potential losses that could occur if banks don’t take precautions to hedge their long-term investments, which could sharply decrease in value.
