Deutsche Bank Shares Rebound as Stress on Banking Sector Eases

A Deutsche Bank branch in Frankfurt am Main, Germany, on Feb. 4, 2021. Armando Babani/AFP via Getty Images

Deutsche Bank shares rebounded on March 27 after plummeting by as much as 16 percent on Friday, suggesting investors may be feeling slightly more optimistic about the current state of the European banking industry.

Shares of Germany’s largest bank were up 6.3 percent as of 15:04 p.m. in Frankfurt, while other European banking stocks, including Commerzbank AG, Barclays Plc, and Banco Santander SA also saw gains.

The Euro STOXX banks index was also up 1.6 percent, and the pan European STOXX 600 was up 1.2 percent as of Monday afternoon.

After tumbling by as much as 16 percent on Friday, Deutsche Bank shares closed 8.5 percent lower when the cost of its five-year credit default swaps (CDS), a type of default insurance for bondholders to protect against potential defaults, rose above 220 basis points, up from 142 basis points earlier in the week.

The increase prompted concerns among investors that the German banking giant could be the next institution to be hit with difficulties after Credit Suisse’s near failure and the collapse of Silicon Valley Bank (SVB) and Signature Bank in the United States, although there did not appear to be a specific problem with Deutsche Bank itself.

Amid the decline in the banking giant’s shares, German chancellor Olaf Scholz sought to dismiss market concerns during a summit in Brussels, telling reporters that the bank has “fundamentally modernized and reorganized its business and is a very profitable bank.”

“There is no reason to be concerned about it,” Scholz added when quizzed over whether the lender would become “the next Credit Suisse.”

Scholz later added, “The capital adequacy of European banks is robust, thanks to the work [we’ve put in] over the past few years and also thanks to the efforts of the banks themselves,” according to a translation by the Financial Times.

Silicon Valley Bank Finds Buyer

Elsewhere, on Sunday, U.S. regulators announced that First Citizens Bank is buying the loans and deposits of failed SVB after entering into a purchase and assumption agreement.

According to a statement issued by the Federal Deposit Insurance Corporation (FDIC),  the Raleigh, North Carolina-based bank will buy around $72 billion of SVB assets at a discount of $16.5 billion. Around $90 billion in SVB assets will remain in receivership with the FDIC, which received around $500 million in First Citizens stock.

The 17 former branches of SVB will open as First Citizens Bank & Trust Company on March 27, 2023, the FDIC said.

Overall, the deal is expected to cost the FDIC around $20 billion, although the exact cost will be determined once the FDIC terminates the receivership.

“The recovery could reflect investors having a few days to reassess and decide things aren’t as bad as they seemed,” Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, told the Financial Times of Monday’s rise in European stocks. “There were all sorts of stories at the weekend saying Deutsche Bank is nowhere near as risky [as Credit Suisse], but it’s too early to tell and we have to see how things shake out.”

As well as a rise in euro stocks on Monday, spreads on five-year senior credit default swaps also dropped to 198.6 basis points after reaching as high as 226.9 basis points on Friday, Bloomberg reported, no doubt bringing further relief after Friday’s frenzy.

Elsewhere, Chris Beauchamp, chief market analyst at IG Group, said that Friday’s panic over Deutsche Bank may have been “misplaced,” but noted that the storm may not be over just yet.

“The steady drain of deposits from banks means a slow motion problem is in the making, and could result in a contraction in lending that brings on a recession,” Beauchamp told Reuters. “This is the bigger risk than the hunt last week for the next domino to fall in the global banking system,” he added.