Banking stocks fell sharply in Europe on Friday, with shares in Deutsche Bank and UBS Group hurting on concerns that the worst problems in the sector since the 2008 financial crisis had yet to be contained.
Deutsche Bank shares fell for a third day, down 8.5%, at the close, after a sharp jump in the cost of insuring against default late on Thursday.
Deutsche Bank shares fell 8.5% after a sudden rise in the cost of insurance against default
Shares in the German bank have lost a fifth of their value so far this month, and the cost of default swaps, a form of insurance for bondholders, jumped to a four-year high on Friday, according to data from Standard & Poor’s Market Intelligence.
Deutsche Bank declined to comment when contacted by Reuters.
The global banking sector has been shaken since the sudden collapse of two US regional banks this month. Policymakers emphasized that the turmoil differed from the global financial crisis 15 years ago, saying banks are better capitalized and funds are more readily available.
Fears are spreading fast
But fears quickly spread, and UBS rushed to take over Credit Suisse on Sunday after the ailing Swiss bank lost investor confidence.
According to two people familiar with the matter, the Swiss authorities and UBS are racing to complete the takeover within a month in an effort to retain Credit Suisse customers and employees.
Separate sources told Reuters that UBS had pledged to pay additional incentives to Credit Suisse wealth management staff in Asia to stem an exodus of skilled staff.
Brokerage Jefferies Group downgraded UBS to “hold” from “buy,” saying the takeover of its former rival would change the bank’s shares, which were based on lower risk, underlying growth and higher capital returns.
“All of these elements, on which UBS shareholders bought shares, are gone, perhaps for years,” she said.
Separately, Bloomberg News reported that Credit Suisse and UBS are among the banks under scrutiny in a US Justice Department investigation into whether financial professionals helped wealthy Russians evade sanctions.
We are still on the brink
Credit Suisse and UBS declined to comment, while the Ministry of Justice did not respond to emailed requests from Reuters for comment.
Shares of “UBS” and “Credit Suisse” also fell by 3.6% and 5.2% at closing.
Investor pain spread across the banking sector, with the European Banks Index down 3.8%, its third weekly decline, after the collapse of mid-sized US banks and turmoil at Credit Suisse highlighted the rising risks for banks in the wake of tightening monetary policy.
“We’re still on edge waiting for another domino to fall, and it’s clear that Deutsche Bank is the next one on everyone’s mind (fairly or otherwise),” said Chris Beauchamp, chief market analyst at IG.
“It seems that the banking crisis is not completely over,” he added.
Deposit protection
The drop in European banking stocks follows US losses on Thursday as investors were looking to see how far the authorities would support the sector, especially the fragile banks.
For the fourth time in a week, US Treasury Secretary Janet Yellen spoke Thursday to reassure the public that the US banking system is safe.
She told US lawmakers that bank regulators and the Treasury Department are ready to provide blanket guarantees on deposits at other banks, as they have done at Silicon Valley Bank and Signature Bank.
Shares of major US banks such as JPMorgan Chase & Co, Wells Fargo and Bank of America fell by 0.4% in pre-trading on Friday. And the mixed performance of regional banking stocks, which are the biggest concerns of investors.
The Credit Suisse bailout also raised broader concerns about investors’ dealings with a fragile banking sector. The decision to prioritize shareholders over additional Tier 1 (AT1) bondholders shook the market for these $275 billion bonds.
The purpose of these convertible bonds is to be used during bailouts to prevent taxpayers from being charged for the bailouts.
Real risk
As part of the agreement with UBS, the Swiss regulator insisted on canceling Credit Suisse’s Additional Tier 1 (AT1) notes with a face value of $17 billion, sending global credit markets into a stupor.
Bill Winters, chief executive of Standard Chartered Bank, said on Friday that the cancellation had “profound” implications for the regulation of global banks.
He also said at a financial forum in Hong Kong that the Federal Reserve’s move to guarantee uninsured deposits was a “real risk”.
And US authorities resorted to “systemic risk exceptions” that allowed them to protect uninsured deposits, including those of wealthy CEOs of technology companies and investors in cryptocurrencies, after the collapse of Silicon Valley and Signature banks.
