European stock markets close sharply lower on renewed bank jitters. Markets reduced losses after European Central Bank President Christine Lagarde told EU leaders the Euro area banking sector was ‘resilient due to strong capital, liquidity positions and post-2008 reforms’. Lagarde also said the ECB toolkit was equipped to provide liquidity to the financial system if needed.
But banks dropped 3.8% despite the Lagarde’s reassurances. Citigroup this week downgraded the European banking sector to “neutral”, citing the effects of continued monetary policy tightening.
Shares in Deutsche Bank fell sharply on Friday, dragging down major European banks, as Germany’s Chancellor played down the risk of a banking crisis developing from recent global financial turbulence.
In a sign of market jitters in Europe, shares of Germany’s largest lender, fell as much as 14% in Frankfurt.
It follows a steep rise in the cost to insure bondholders against the bank defaulting on its debts, known as credit default swaps. Rising costs on insuring debt were also a prelude to a government-backed takeover of Swiss lender Credit Suisse by its rival UBS.
The hastily arranged Credit Suisse-UBS marriage Sunday aimed to stem the upheaval in the global financial system after the collapse of two US banks and jitters about long-running troubles at Credit Suisse led shares of Switzerland’s second-largest bank to tank and customers to pull out their money last week.
“There is no reason to worry,” German Chancellor Olaf Scholz said, responding to a reporter who asked whether Deutsche Bank could be the next Credit Suisse.
“Deutsche Bank has thoroughly modernized and reorganized its business and is a very profitable bank,” Scholz said, speaking after a European Union summit in Brussels.
The European economy has been slowing rapidly since Russia invaded Ukraine, leaving the EU flirting with recession. The war has fuelled inflation by prompting cuts in supplies of previously abundant Russian oil, natural gas and coal and dented consumer and business confidence.
The European Commission, the EU’s executive arm, expects economic growth in the 27-nation bloc to slow to 0.8% this year from 3.5% in 2022 and 5.4% in 2021. A projected rebound in growth to 1.6% next year depends on a sound banking sector able to lend to businesses and consumers and protect deposits.
The EU has beefed up its regulation of financial institutions since the euro debt crisis and little sign had emerged before Friday of broader contagion in Europe from Credit Suisse’s dramatic rescue.
Nonetheless, financial supervision in Europe remains a patchwork of EU and national authorities pursuing common approaches rather than heeding an actual single European rulebook. For example, the euro area still lacks a common deposit insurance system, which is widely considered a key defence against future European bank crises.
Across the Atlantic, stocks fell on Wall Street, as the S&P 500 was 0.8% lower in early trading.
The Dow Jones Industrial Average was down 239 points, or 0.7%, at 31,865, as of 9:42 am local time, while the Nasdaq composite was 0.8% lower.
Markets have been turbulent on worries that banks are weakening under the pressure of much higher interest rates.
That’s led to rising concerns about a possible recession and heavy uncertainty about what the Federal Reserve and other central banks will do with interest rates going forward.