The panic that was sparked by the collapse of two US banks and the hurried takeover of Swiss giant Credit Suisse may be difficult to contain, as evidenced by the sharp declines in banking shares in Europe.
On Friday, Deutsche Bank stock dropped by 14% at one point, and other lenders also suffered significant losses.
The day ended with the London FTSE 100 down 1.3 percent, and stock markets in Germany and France fell even more sharply.
However, US concerns were not realized.
The Dow Jones Industrial Average rose 0.4 percent, the S&P 500 rose almost 0.6 percent, and the Nasdaq ended up 0.3 percent after falling earlier in the day.
Despite the declines in the shares of major banks like JPMorgan Chase and Morgan Stanley, the rise was achieved.
Germany’s Commerzbank was among the European banks that were affected by a sell-off caused by worried investors. Commerzbank’s shares fell about 5%. Societe Generale ended down about 6% in France, while Standard Chartered fell more than 6% in the UK.
Deutsche bank ended the day more than 8% lower.
Despite recovering from its worst losses, Deutsche bank ended the day more than 8% lower.
“Indicative of a wider loss of confidence in the banking sector” was the statement made by AJ Bell investment director Russ Mould to the BBC regarding the sharp rise in the cost of insurance against a possible bank default and the decline in Deutsche Bank’s share price.
He stated, “There is a general fear that central banks may have overdone it with interest rate increases, having left them too low for too long.”
As part of their efforts to encourage economic growth, central banks cut interest rates during the global financial crisis of 2008 and again in 2020 when the pandemic struck.
However, in an effort to contain rapidly rising prices, authorities have increased interest rates significantly over the past year or so.
The value of the investments in which banks invest a portion of their funds has been impacted by these rate hikes, which in turn has contributed to the failure of US banks.
High-profile investors have expressed concern that the collapses in share prices are signs of deeper systemic issues and that additional areas of distress are yet to emerge.
Mr. Mould stated that the possibility of a recession has also increased as a result of higher interest rates, and in the event of one, “banks will generally find it pretty hard going.”
German Chancellor Olaf Scholz defended Deutsche Bank
Governments and central banks have been attempting to ease market concerns.
At a news conference on Friday, German Chancellor Olaf Scholz defended Deutsche Bank, noting that it was “very profitable” and had “thoroughly reorganized and modernized its business model.”
The BBC was also informed by Bank of England governor Andrew Bailey that the UK banking system was “safe and sound.”
However, confusion has resulted from contradictory statements made by US authorities regarding whether or not they are prepared to guarantee all bank deposits. As a result, it appears that hopes of restoring calm to the sector were premature.
The Federal Reserve reported that use of an emergency lending program for banks that the US central bank created this month has increased over the past week. Additionally, US Treasury Secretary Janet Yellen called an unexpected meeting with regulators on financial stability on Friday.
Bloomberg News also reported about Deutsche bank that the US Department of Justice was looking into whether UBS and Credit Suisse had assisted Russian oligarchs in avoiding sanctions.
In the meantime, the financial chaos brought on by the failures has made it unclear how much higher interest rates could go.
Jerome Powell, the chairman of the Federal Reserve, stated this week that the bank may not significantly increase borrowing costs if the banking panic continues to impact lending and slow economic growth.
However, St. Louis Fed President James Bullard, who is not currently a member of the rate-setting committee, stated on Friday that he believed the panic would subside, leading to higher interest rates than the roughly 5% that is anticipated at the moment.
Germany’s Bundesbank president Joachim Nagel said that central banks should keep raising interest rates because inflation is still so high.
He didn’t say anything about Deutsche Bank, but he said that after the failures of Silicon Valley Bank and Signature Bank in the US and the UBS takeover of Credit Suisse, market turmoil was to be expected.
He stated, “In the weeks following such interesting events, it is frequently a bumpy road.”