BANK SHARES TUMBLED today, jolting stock markets as fears about the health of the financial sector resurfaced, with Deutsche Bank now in the eye of the storm.
Markets had rallied earlier this week after financial authorities took steps aimed at preventing contagion from the collapse of US regional lenders earlier this month.
But sentiment has soured following decisions by central banks in the United States, Britain and Switzerland to hike interest rates despite concerns about the impact of the monetary tightening on banks.
Fears of contagion led to the takeover of embattled Swiss bank Credit Suisse by domestic rival UBS on Sunday.
The focus has now turned to another major European lender, Deutsche Bank, whose shares nosedived by as much as 14% today as the cost of insuring against the bank defaulting on its debt spiked. It closed 8.5% lower.
The German lender returned to financial health last year following a major restructuring after years of problems.
European officials lined up to reassure the markets.
German Chancellor Olaf Scholz said after an EU summit that “there is no reason to be concerned” about Deutsche Bank as the lender is “very profitable”.
European Central Bank President Christine Lagarde told EU leaders that the single currency area’s banking sector is “resilient because it has strong capital and liquidity positions”, according to an EU official.
But City Index analyst Fiona Cincotta told AFP that the selloff in bank shares has highlighted “just how fragile sentiment is towards the sector”.
“As central banks continued hiking rates this week the outlook is looking increasingly shaky,” she told AFP, adding that “Deutsche Bank has come under the spotlight as a possible target for contagion risk.”
European stock markets finished another turbulent week sharply lower, with London down 1.3% while Frankfurt and Paris both shed around 1.7%.
Wall Street’s three main indices opened lower but the Dow and S&P 500 steadied around lunch time.
Shares in US financial giant JPMorgan Chase and Citigroup were down around 2% while Bank of America fell 0.5%.
In Paris, Societe Generale sank more than 6% and BNP Paribas dropped more than 5%.
UK bank Standard Chartered also tanked by more than 6% in London while Barclays was down around 4%.
Concerns that the turmoil could trigger a recession sent oil prices sliding more than 2%.
Share prices in energy majors including BP, Shell and TotalEnergies also tanked.
Global markets were slammed earlier this month by the collapse of three regional US lenders, notably Silicon Valley Bank, which had lost $1.8 billion in the sale of a bond portfolio whose value dropped due to the higher interest rates.
US authorities moved to protect bank deposits but Treasury Secretary Janet Yellen revived concerns on Wednesday when she said authorities were not looking at a blanket increase in deposit insurance for banks.
Yellen was chairing a meeting of financial regulators today.
“Contagion fears are not yet going away,” said Finalto analyst Neil Wilson.
“It only stops once people stop asking who’s next. And it does not seem like we are at that stage yet.”
Some investors are hopeful, however, that central banks could be nearing the end of their interest rate-hiking cycle.
The turmoil has forced the Fed and others to change their monetary policy game plan to avoid further problems in the finance industry.
On Wednesday, the Fed indicated it could pause soon after announcing a quarter-point rate hike – half what was expected before the latest upheaval.
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