Shares in Deutsche Bank, Germany’s largest lender, fell by as much as 14% on Friday, with other banks across Europe also seeing significant losses. Commerzbank in Germany fell by 5%, Societe Generale in France dropped by 6%, and Standard Chartered in the UK was down over 6%. Deutsche Bank did recover somewhat but still closed over 8% lower.
The reason for the sell-off appears to be linked to the sharp rise in interest rates by central banks around the world in response to the recent surge in inflation. These rate rises have hit the value of investments that banks keep some of their money in, and have contributed to the failures of some banks in the US.
Despite this, German Chancellor Olaf Scholz defended Deutsche Bank at a news conference on Friday, stating that the bank had “thoroughly reorganized and modernized its business model” and was “very profitable”. However, Scholz’s credibility has been called into question in recent years due to his role in the Wirecard scandal. Wirecard, a German payments company, collapsed in 2020 after it was revealed that it had a $2.1bn hole in its accounts.
Olaf Scholz was the Finance Minister of Germany during the Wirecard scandal. As the head of the ministry responsible for overseeing financial regulation, he faced criticism for not doing enough to prevent fraud and for failing to act quickly when the scandal came to light.
Additionally, Scholz was a member of the so-called “control gremium” – a group of government officials who were responsible for overseeing the work of the financial regulator BaFin. The gremium met regularly to discuss issues related to financial regulation and to provide guidance and oversight to BaFin.
During the Wirecard scandal, there were questions about whether the gremium was aware of the potential problems at Wirecard and whether they took appropriate action to investigate and address the issues. Some critics argued that the gremium was too closely tied to the companies it was meant to regulate, and that this contributed to the failure to prevent the fraud at Wirecard.
Scholz has faced criticism for his role in the Wirecard scandal and his handling of the aftermath. He has denied any wrongdoing and has defended his actions, but his credibility and political future have been called into question as a result of the scandal.
The recent turmoil in the banking sector has led to confusion and concerns about the stability of the system. In the US, there have been mixed messages from authorities about whether they are prepared to guarantee all bank deposits, leading to further uncertainty. US Treasury Secretary Janet Yellen convened an unexpected meeting with regulators on financial stability on Friday, and the use of an emergency lending program for banks created by the Federal Reserve has increased over the past week.
Joachim Nagel, president of Germany’s Bundesbank, has said that rampant inflation means that central banks should continue to raise rates. He declined to comment on Deutsche Bank specifically but said that market turmoil was to be expected after the failures of Silicon Valley Bank and Signature Bank in the US, and the UBS takeover of Credit Suisse.
Despite the recent sell-off, there is hope that the banking sector will recover in the coming weeks and months. However, the ongoing concerns about inflation and the stability of the banking system mean that there could be further bumps in the road ahead.
Deutsche Bank faces challenges in the coming years due to the rising cost of wholesale funding, according to a report by JPMorgan’s banking analysts. The report highlights that Deutsche Bank is more exposed than its European rivals to these funding costs, which could lead to negative impacts on its profitability in the future. The bank may need to reduce its costs further to achieve its target of generating returns above 10% and distributing €8bn of capital to shareholders by 2025. Despite the bank’s booming trading revenues last year, its return on equity in 2022 was only 8.4%, which is below the cost of capital and may be unsustainable in the long run.