Deutsche Bank leads slide in European bank shares

European bank stocks took a heavy hit on Friday, with Deutsche Bank falling as much as 13 per cent, as efforts by policymakers to reassure investors over the health of the sector failed to calm nerves in the wake of a string of failures on both sides of the Atlantic.

The Euro Stoxx 600 banks index, which contains the region’s biggest lenders, fell 4.6 per cent by mid-morning, outstripping weakness in broad national indices. Germany’s Commerzbank fell 9 per cent, while France’s Société Générale lost 7 per cent and Finland’s Nordea shed 9.8 per cent.

After the outbreak of stress in US regional banks, and last weekend’s hasty takeover of Credit Suisse by its rival UBS, global authorities have repeatedly tried to assuage investors’ concerns over the financial hit that banks may take from central banks’ aggressive interest rate rises of the past year.

European Central Bank president Christine Lagarde last week said there was “no trade-off” between seeking to control inflation and seeking to foster financial stability. On Thursday, US Treasury secretary Janet Yellen said regulators were “prepared to take additional actions if warranted” to ensure the safety of bank deposits. But bank stocks are now falling into an increasingly stubborn pattern of brief periods of stability followed by intense periods of stress.

“There’s still a nagging question amongst market participants over whether the turmoil in the banking sector is over or if there will be wider contagion,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe. “It is also now evident from central banks that the turmoil is not going to put a hard brake on their monetary policy actions — that’s sending jitters through markets because it might exacerbate or expose new vulnerabilities in the banking sector.”

Friday’s moves in Deutsche Bank’s shares came after the cost of buying insurance to protect against it defaulting on its debt pushed higher this week.

The price of the bank’s five-year credit default swaps — derivatives that act like insurance and pay out if a company defaults on its payments — climbed from 134 basis points on Wednesday to 198bp on Friday, according to data from Refinitiv.

Dirk Willer, strategist at Citigroup, said it was “too early to tell” whether banking sector stress had grown large enough to meaningfully have an impact on the US business cycle. But he added that in light of heightened uncertainty, the Federal Reserve had “become more cautious, as did the ECB”.

“We remain negative on risky assets given that the banking stress tightens credit and reaffirms Citi’s call for a US recession in [the second half] of 2023,” Willer said.

The Fed on Wednesday proceeded with a 0.25 percentage point interest rate increase and the Bank of England on Thursday also raised its benchmark rate by 0.25 percentage points. The Swiss National Bank on Thursday raised interest rates by 0.5 percentage points, despite being a major theatre for the banking panic due to the collapse of Credit Suisse and its forced acquisition by rival UBS. The ECB last week raised rates by 0.5 percentage points.

Emmanuel Cau, head of European equity strategy at Barclays, said: “It’s about sector composition, Europe is very tilted towards banks, which have been in the eye of the storm . . . and there are bank-specific issues to worry about like regulation and deposit safety.”

Investors are now anticipating that the Fed will pause its rate-raising cycle, keeping rates on hold at its next meeting in May before cutting in September, while anticipating a 0.25 percentage point rise from the ECB meeting and no cuts in 2023.

Futures tracking the blue-chip S&P 500 fell 0.7 per cent, while contracts following the tech-heavy Nasdaq dropped 0.4 per cent.