Ilast few weeks, Eurozone investors are experiencing distrust.can bank trouble Does it really remain confined to America and Switzerland? On March 24, that skepticism faded when European bank stocks crashed. By the end of the day, European Central Bank President Christine Lagarde commented that European banks were safe and had enough liquidity to withstand market scrutiny.
The sale began with German lender Deutsche Bank, which had been in trouble for years. Credit default swaps, tradeable insurance against bank defaults, have jumped to near-record levels. In response, investors sold off the company’s stock, sending the stock price down 14%. Fear spreads. By mid-afternoon, the Euro Stox 600 bank index, which includes the region’s largest lenders, was down 5%.later Credit Suisse bankruptcyended in a tie-up with UB On March 19th, investors wondered if another fateful weekend was in store.
How bad does Deutsche Bank look like? Let’s start with a direct comparison to that of Credit Suisse. His 300 km separating Frankfurt and Zurich isn’t the only thing that sets the two institutions apart. Swiss banks were unprofitable and faced huge legal battles. But the real reason Credit Suisse became a prime candidate for a lightning bank run was that nearly all of its deposits were uninsured.
In contrast, Deutsche Bank is profitable after a long and painful restructuring. About 70% of retail deposits are insured, as are the businesses that store cash there. Deposits barely moved in 2016 when a combination of poor performance, investigations and scandals rocked banks. Lenders have a number of high-quality, liquid assets that they can exchange for cash at the European Central Bank if things go awry. The Credit Suisse scenario of a self-propelled bank run is unlikely.
However, there are other threats as well. These include rising interest rates that have bankrupted Silicon Valley banks (svb). Higher interest rates are good for banks in the short term because they generate more interest income. In fact, European banks are making significant profits. His 2022 net profit for Deutsche Bank was €5.7 billion ($6.1 billion), double his previous year’s.
But as funding costs rise, bank assets such as long-term bonds lose value. Fortunately for Deutsche Bank, European regulators require lenders to hedge this risk. Last year, the European Central Bank reported that net duration risk (how much a bank would lose if interest rates rose) was a low percentage of regional banks’ regulatory capital. According to analyst firm Autonomous Research, Deutsche Bank’s high risk doesn’t pose much danger.
Another concern is svb Deutsche Bank’s US portfolio is affected. Commercial real estate looks like midsize lenders will struggle with credit tightening. Deutsche Bank has nearly $17 billion in such assets, making him one of Europe’s most endangered banks. However, the lender’s commercial real estate portfolio is well diversified, with limited debt and representing only 35% of high quality capital. Deutsche Bank may have significant holdings of derivatives, which are dangerous instruments in volatile markets, but which are openly traded and often grossly mispriced. less likely.
Perhaps the biggest concern is Deutsche Bank’s funding costs, which could rise in the wake of the Credit Suisse collapse. Deutsche Bank has more capital than Europe’s strict rules require, but additional Tier 1 investors (and1) Bonds wiped out by UB Acquisition Credit Suisse insurance companies will demand higher premiums.and andA 1 indicates that Deutsche Bank has a higher proportion of risk-weighted assets than other banks.
But the main reason for the sale isn’t the horrific skeletons in the Deutsche Bank closet. Instead, it’s more like “uncertainty overreacting to weak signals,” says European bank veteran Corrado Passera. The market for Deutsche Bank credit default swaps is illiquid. After the weekend when investors lose their shirt, traders will want to sell something with a little bit of risk to enjoy a few days of peace. ■
https://www.economist.com/finance-and-economics/2023/03/24/after-credit-suisses-demise-attention-turns-to-deutsche-bank After the demise of Credit Suisse, Deutsche Bank is in the spotlight