(Original title: Deutsche Bank becomes the next domino? Analyst: If the market is too panicked, it may “make the fake come true”)
Financial Associated Press, Shanghai, March 25 (edited by Huang Junzhi)The banking crisis is still brewing and is still on the verge of danger. Deutsche Bank is the latest in the turmoil following the bailout of Credit Suisse. Shares in the bank fell sharply on Friday, falling as much as 14% at one point during the session. The previous night, the bank’s credit-default swaps had spiked.
Deutsche Bank issued an emergency announcement saying that it will redeem the secondary subordinated bonds in advance. Such moves are usually aimed at reassuring investors about the strength of a company’s balance sheet. The German Chancellor also rushed out to “fight the fire” during the session.
German Chancellor Olaf Scholz said Deutsche Bank had no cause for concern. Deutsche Bank has fundamentally modernized and restructured its business model and is “marginally profitable”, he said. He also stressed that Europe’s banking system is very stable and resilient.
However, the reaction of Deutsche Bank’s share price suggests that market sentiment has not been soothed. On Friday, Deutsche Bank’s shares listed on the Frankfurt Stock Exchange closed down 8.53%, and its US stocks also closed down more than 3%.
Now, the market seems to have decided that Deutsche Bank is the next “domino” that is about to fall. As some commentators have pointed out, even if the German banking giant has plenty of liquidity to weather the crisis, it’s scary that it might not matter.
As is often the case in banking crises, concerns about Deutsche Bank could quickly become a “self-fulfilling prophecy” like Credit Suisse. On paper, Credit Suisse shouldn’t have needed a bailout, but in the end, the loss of market and client confidence effectively killed it.
In such an atmosphere of “near madness” – a chronic intertwining of destructive inflation, seemingly endless interest rate hikes and a fragile geopolitical situation – it’s no wonder market confidence is so fragile, analysts said.
In fact, there is plenty of data to prove that business activity across Europe has been remarkably resilient. UK production was unchanged in March and costs fell to a two-year low. Economic growth in the euro zone hit a 10-month high as energy costs fell. The French economy is growing at its fastest pace since last May, even as protests have rocked the country.
The latest transaction figures from the high street, as well as positive consumer sentiment figures, should be more upbeat. Sales were higher than expected and shoppers were spending in everything from luxury goods to discounters. Meanwhile, consumer sentiment hit a one-year high. If inflation falls sharply later in the year, as widely forecast, there could be a mini-consumption boom that boosts growth.
Therefore, in fact, we have every reason to believe that the sky will not fall. The danger, however, commentators say, is that any optimism will be wiped out by this bout of banking panic.
As Germany’s largest financial institution, Deutsche Bank holds about $1.4 trillion in assets, firmly in the “systemically important” category. There’s plenty of reason to think it won’t be the next domino to fall. The bank comfortably met all the stringent capital requirements imposed on the banking industry after the financial crisis, suggesting it is well capitalized, liquid and well funded.
But the same is true of Credit Suisse. As such, recent events have shown that once investor confidence is lost, it is extremely difficult to regain. If the market has decided that Deutsche Bank is next, any semblance of hope is likely to be squashed by a wave of hasty exits.