Bank shares across Europe have fallen sharply as concerns over the financial strength of the sector return.
The drop in share prices and a sharp jump in the cost of insuring against a possible default by Deutsche Bank has sparked fears of a wider loss of confidence in the banking sector. This comes after the collapse of two US banks and the rushed takeover of Swiss giant Credit Suisse by its rival UBS. Stock markets in London, Germany and France were all lower.
Investors have been spooked by the possibility that central banks may have overdone it with interest rate increases, having left them too low for too long. Central banks slashed interest rates during the 2008 global financial crisis and again when the pandemic hit in 2020 as part of efforts to encourage economic growth. But over the past year or so, banks have been raising rates sharply to try to tame soaring price increases. These rate rises have hit the value of investments that banks keep some of their money in, and contributed to the bank failures in the US.
Share prices have fallen across the sector, as high profile investors warn the collapses are symptoms of deeper problems in the system, with other pockets of distress yet to emerge. Higher interest rates have also raised the possibility of recession, and if that happens, "banks will generally find it pretty hard going," warns Russ Mould, investment director at AJ Bell.
Central banks and governments have been trying to calm market worries. On Friday, Bank of England governor Andrew Bailey told the BBC that the UK banking system was "safe and sound". But mixed messages from US authorities as to whether they were prepared to guarantee all bank deposits have led to confusion, and hopes that calm had been restored to the sector appear to have been premature.
The use of an emergency lending program for banks that the US central bank created this month has increased over the past week, the Federal Reserve reported. Bloomberg News also reported that UBS and Credit Suisse were being investigated by the US Department of Justice into whether they had helped Russian oligarchs avoid sanctions.
Joachim Nagel, president of Germany's Bundesbank, said still rampant inflation meant central banks should continue to raise rates. He declined to comment on Deutsche Bank but said market turmoil was to be expected after the failures of Silicon Valley Bank and Signature Bank in the US and the UBS takeover of Credit Suisse.
The current situation in the banking sector is a reflection of the wider economic environment. The global economy has been hit hard by the COVID-19 pandemic, and central banks have been trying to support it by keeping interest rates low. However, inflation has been rising sharply, and central banks have had to raise rates to try to control it. This has put pressure on banks, as it has hit the value of investments that they keep some of their money in.
The recent collapse of two US banks and the rushed takeover of Credit Suisse by UBS has further dented investor confidence. It has highlighted deeper problems in the system, and there are concerns that other pockets of distress may yet emerge. The situation is complicated by mixed messages from US authorities about whether they are prepared to guarantee all bank deposits.
There are serious concerns about the financial strength of the banking sector, and this is having a knock-on effect on the wider financial markets. Share prices have fallen across the sector, and high profile investors are warning that this is just the beginning. Central banks and governments are trying to calm market worries, but the situation remains fragile.
Bhumesh is the Managing Partner of Corp Comm Legal, an Indian law firm. He is ranked among the Top 100 Indian corporate lawyers. He is advising domestic and foreign companies on M&A, joint ventures, corporate - commercial issues. Besides, he has written a book on Drafting of Commercial Agreements, has a couple of books in pipeline and trains students and professionals on Drafting Skills and corporate laws. He writes regularly on legal, business & other issues and is a guest faculty lecturer with educational institutes. Bhumesh holds a Bachelor of Laws (LLB) from the University of Delhi and a further qualification in International Law and Legal Studies from College of Law, York.