Deutsche Bank experienced a major fall in stock prices on Friday as panic ensued. The global banking system is shaking, will it hold?
After Credit Suisse, another major European bank is in dire straits. Deutsche Bank opened on Friday with a 6% fall, which only increased for the whole morning. At 11:30, Deutsche Bank’s stocks plummeted by 14%.
The fall in stock price happened as Deutsche Bank’s credit default swaps (CDS) increased in value. CDS are a form of insurance against the bank’s default, therefore its sudden increase means that a collapse of the bank itself might be approaching.
Earlier this week, Credit Suisse was also on the verge of collapse, before getting immediately bailed out by the Swiss government. Both Credit Suisse and Deutsche Bank are being closely watched by analysts since 2019, when their CDS again spiked in value.
As Stuart Cole of Equiti Capital put it: “Deutsche Bank has been in the spotlight for a while now, in a similar way to how Credit Suisse had been. It has gone through various restructurings and changes of leadership in attempts to get it back on a solid footing but so far none of these efforts appear to have really worked.”
The major risk is that investors will start pulling out and withdraw their money from Deutsche Bank. Were that to happen, it would force the German government to intervene with a bail-out.
But Deutsche Bank might be just the latest domino in a larger sequence of banks collapsing.
“The US banking system is sound and resilient”
On Tuesday, the US Federal Reserve raised interest rates again by 0.25%. In doing so, Fed’s chairman Jerome Powell wanted to reassure that the American banking system was safe and sound.
Powell had to make this reassurance, because last week two major US banks collapsed one after the other. Signature and Silicon Valley Bank, two international institutions, went bankrupt after failing to cover their debt.
This collapse was partly caused by the rising interest rates, and sent shock waves across the global banking system. Governments and institutions alike were worrying that a general recession was approaching, which in turn generated further panic.
The European Central Bank (ECB) also followed the Fed in their interest rate hikes strategy.
Today, every European stock market is painted in red. The Deutsche Bank fall can perhaps be salvaged, but it is one too many banks to experience a near-collapse day.
Do governments and central banks have enough liquidity to bail every bank out? Will banks resist until interest rates are brought down?
It is hard to tell. It is also hard to stay optimistic.
