As concerns over the sector’s financial health resurface, bank stocks across Europe have declined sharply.
Shares of Germany’s Deutsche Bank fell 14% at one point on Friday, and other financial institutions also experienced significant losses.
Investors have already been frightened by the failure of two US banks and the hurried acquisition of Credit Suisse by UBS, it’s rival.
The stock exchanges in London, Germany, and France all declined.
The three main U.S. exchanges were also lower at the start of trading, dragged lower in part by declines in financial company stocks, including Morgan Stanley, JP Morgan Chase, and Goldman Sachs.
Germany’s Commerzbank and France’s Societe Generale, both down roughly 6%, were among the other banks in Europe to see significant share declines. Standard Chartered was the largest decliner in the United Kingdom, falling more than 6%.
Russ Mould, investment director at AJ Bell, told that the decline in Deutsche Bank’s share price and the sharp increase in the cost of insuring against the bank’s potential default “indicate a wider loss of confidence in the banking sector.”
“Central banks may have overdone it with interest rate hikes after leaving them too low for too long,” he said.
To stimulate economic development, central banks reduced interest rates during the 2008 global financial crisis and again when the pandemic struck in 2020.
However, over the past year or so, banks have drastically increased interest rates to curb soaring inflation.
These rate increases have impacted the value of investments in which banks invest a portion of their funds. Thereby contributing to bank failures in the United States.
The sector as a whole has experienced a decline in share prices as prominent investors warn that the collapses are symptoms of underlying systemic problems, with additional pockets of distress still to come.
Mr. Mould stated that higher interest rates have also increased the likelihood of a recession, and if this occurs, “banks will generally have a difficult time of it.”
Governments and central banks have been attempting to assuage market concerns.
Friday at a news conference, German Chancellor Olaf Scholz defended Deutsche Bank, observing that it had “thoroughly reorganized and modernized its business model” and was “very profitable.” In afternoon trading, Deutsche shares recouped some losses.
Andrew Bailey, governor of the Bank of England, told that the British banking system was “safe and sound.”
Inconsistent messages from U.S. authorities regarding their willingness to guarantee all bank deposits have led to confusion and dashed expectations that calm has been restored to the sector.
The Federal Reserve stated that emergency lending programme usage increased over the past week.
According to Bloomberg News, the US Department of Justice is investigating whether UBS and Credit Suisse assisted Russian oligarchs in evading sanctions.
Due to high inflation, Bundesbank president Joachim Nagel said central banks must keep raising interest rates.
He predicted market chaos after Silicon Valley Bank and Signature Bank collapsed in the US and UBS acquired Credit Suisse.
“In the weeks following such fascinating events, the road is frequently rocky,” he said.
