Shares of Germany’s biggest bank fell as much as 15%. This was the third day in a row that they went down, but they have since gained some ground and are now down 10%. With credit-default swaps, the price of insurance against its default went up to its highest level since 2020.
A few days earlier, Credit Suisse Group AG was taken over by its bigger and more stable rival, UBS Group AG. This made people worry about Deutsche Bank. Since the Silicon Valley Bank in the U.S. failed earlier this month, investors have been looking all over the world for institutions they think are weak.
Jon Jonsson, a credit portfolio manager at Neuberger Berman, said, “People want to avoid anything that could bring attention to them.”
Deutsche Bank is the most important bank in Germany. Even though the bank has been shrinking for years to make it safer and smaller, it is still a very important bank around the world, with a big presence on Wall Street where it trades bonds, derivatives, and currencies. It helps big companies with things like lending, managing money, and keeping corporate accounts.
German Chancellor Olaf Scholz told reporters at an EU summit in Brussels on Friday that Deutsche Bank has completely updated and reorganised its business model and is now a very profitable bank. “There is no reason to worry about anything.”
Some analysts and investors seemed confused about why Deutsche Bank was getting so much bad press from the market. Even though it has been known for a long time as one of Europe’s most troubled banks, a change that started in 2019 made its operations more stable. In recent quarters, unlike Credit Suisse, Deutsche Bank’s deposit base has stayed the same. The Frankfurt bank made the most money since 2007 last year.
“The stock market is nervous. Tatjana Greil Castro, a portfolio manager at Muzinich & Co., said, “It seems to be looking for targets only.”
Friday, shares of other European banks fell, but not as much as those of Deutsche Bank. Shares of Commerzbank AG, another bank in the same city, fell 6.5%. Barclays PLC and BNP Paribas SA, which is France’s most valuable bank, both went down by 5.8%.
One factor hammering Deutsche Bank: In the past few days, posts about the German bank have exploded on social media. This is similar to the social media frenzy that surrounded Credit Suisse last fall, which the executives of that bank said was partly to blame for its eventual failure.
Since the sudden failure of Silicon Valley Bank, the markets have been in a tizzy. This has shown investors how quickly trust in banks can be lost. SVB was a bank that not many people knew about. Even though it had an investment-grade credit rating and what seemed to be a loyal group of customers and investors, it failed in a matter of days.
Signature Bank joined within a few days, and Credit Suisse was forced to make a deal after being independent for more than 150 years.
This week, the terms of UBS’s takeover of Credit Suisse, which were set up by Swiss regulators, shook the European banking markets, especially the part that said $17 billion of Credit Suisse bonds would have to be written down. These instruments, which are called “additional tier one bonds” or “AT1s,” are an important part of the capital that European banks need to protect themselves from losses. Regulators require them to raise this money in order to protect the banks.
This week, the price of AT1 bonds fell by a lot. The less investors want to buy AT1 bonds and bank bonds in general, the more expensive it is for banks to borrow money, which makes it harder for them to make money.
Tradeweb says that the price of a 2014 Deutsche Bank AT1 bond fell to 69 cents on the dollar on Friday from 95 cents at the beginning of the month. Even though U.K. and European regulators said the capital instruments were important, other bank AT1s also went down.
Friday, Deutsche Bank tried to ease investors’ worries about its debt by offering to buy back a different type of subordinated bond that is due in 2028. The offer said that the bonds would be bought back for 100% of the principal plus interest. This shows that the bank has extra money.
After the offer to buy back the bonds, their prices went up. Even though that helped some bondholders, it didn’t do much to calm worries about the economy as a whole.
Friday’s drop adds to the trend of the shares going down after a big rise at the beginning of the year, when they and other European bank shares did very well. Rising interest rates in Europe and the U.S. meant that businesses would make more money.
Deutsche Bank and other European banks have been hurt for years by the fact that the interest rates in Europe are negative. When interest rates are close to zero or even negative, banks find it hard to charge much more for loans than they pay on deposits. This squeezes what is called the “net-interest margin” in the business world.
Friday, investors worried about banks rushed to buy government bonds for safety. This lowered yields and made it harder for banks to make money.
Deutsche Bank’s past has been a source of doubt for a long time. It had to pay fines because it helped launder money in Russia, kept accounts for a convicted sex offender named Jeffrey Epstein, and didn’t have good internal controls.
Its asset-management arm, DWS, is being looked into in the U.S. for making false claims about how sustainable its investments are. Last year, it agreed to extend the term of an outside compliance monitor after prosecutors from the Justice Department found that the bank had broken a criminal agreement by not telling anyone about a complaint about how DWS handled its ESG investments.
Deutsche Bank was also a big lender to former President Donald Trump, and it got caught up in a long fight between Trump and Congress over who could see his tax returns.
But investors and regulators have, for the most part, been happy with how Deutsche Bank has changed since Christian Sewing became CEO in 2018. He cut down on Deutsche Bank’s investment banking business in the U.S., cut costs, and focused on helping Germany’s big companies.
Analysts say that, unlike Credit Suisse, Deutsche Bank is making money and that most of its big legal problems are behind it. The German bank didn’t lose money when Archegos Capital Management went bankrupt in 2021. That event cost Wall Street a total of $10 billion, with Credit Suisse taking about half of the hit.
Analysts at AllianceBernstein’s Autonomous Research said, “Deutsche is NOT the next Credit Suisse.” They also said that the interest rate risk on Deutsche Bank’s books, which caused problems for U.S. banks, is about the same as that of its European peers and much lower than that of some regional banks in the U.S.
