Days after the collapse of Silicon Valley Bank, another financial titan is showing signs that all is not well. Deutsche Bank, one of the financial world's most prominent players, witnessed a sharp and steady fall in its shares. Placing more pressure on the global financial system, the bank's stock saw a downward trajectory for the third day in a row on Friday.
After trading at a loss of nearly 15 percent, it closed at a decline of nearly 8.5 percent at the end of the day. In the last month alone, Germany's largest bank has experienced a substantial decline in its shares, with a decrease of 24 percent. This performance of Germany's largest lender has set alarm bells ringing among investors across the world.
What happened?
Deutsche Bank is no stranger to financial challenges. The bank was affected by a range of issues when it attempted to compete with Wall Street investment banking giants before the 2008 recession.
What followed was a targeted attempt at revamping the structure of the bank, which entailed tough moves such as thousands of job cuts and a largely Europe-centric approach. The restructuring seemed to have worked, given that it booked its highest annual profit since 2007 in 2022.
However, the shares of the German financial giant have performed dismally over the past month and witnessed sustained selling over the past three days, until Friday. This has resulted in credit-default swaps, which are used to protect against the bank's default, reaching levels that have not been seen since 2020.
This is a cause for concern for the global economy, as Deutsche Bank is one of 30 banks that are considered financial institutions of global significance. As per international rules, such institutions are required to hold higher levels of capital reserves. Failure to do so could lead to widespread losses.
What triggered the crisis?
Deutsche Bank's dismal performance over the past few days can be traced back to the fall of Credit Suisse and its subsequent takeover by the UBS Group. At the same time, the collapse of Silicon Valley Bank (SVB) earlier in the year also did not do much to help investor morale.
Investors are growing increasingly concerned about the overall health of the global banking sector, leading to a surge in the cost of credit default swaps for Deutsche Bank's debt. These swaps serve as a form of insurance against the risk of the bank defaulting, indicating heightened levels of anxiety about the bank's ability to fulfil its financial obligations.
As questions about the health of the European banking system and the vulnerability of the global banking ecosystem grew louder, Deutsche Bank attempted to assuage investors regarding debt issues.
On March 24, it offered to redeem a separate type of subordinated bond that was originally due in 2028. To allay concerns about its financial stability, Deutsche Bank went so far as to offer to repurchase its bonds at a full 100 percent of their principal value, along with any accrued interest. This move suggested that the bank had ample financial resources at its disposal.
But the plunging shares suggest that investors are far from convinced.
What next?
German Chancellor Olaf Scholz has offered reassurances about Deutsche Bank explaining there is no cause for concern. “Deutsche Bank has fundamentally modernised and reorganised its business and is a very profitable bank,” Mr Scholz declared at a summit in Brussels. “There is no reason to be concerned about it,” he said when asked if the lender was the new Credit Suisse.
