As Banking Worries Swirl, Europe’s Policymakers Express Confidence, With Caution

On Friday, the nervousness about banks swept into the eurozone. Shares in Deutsche Bank, Germany’s biggest bank and one with a history of crises, dropped as much as 15 percent, and the price of protection against a default by the bank jumped. There was no obvious direct cause for the shares to fall, but the moves provided a reminder of how quickly these jitters can spread. Germany’s chancellor, Olaf Scholz, responding to the sell-off, said that there was “no reason to be concerned” about the lender and that it had “fundamentally modernized and reorganized its business.” Nevertheless, Deutsche Bank’s shares ended the day nearly 9 percent lower, and shares in other European banks, including Commerzbank and BNP Paribas, also fell.

Despite tougher regulations since the 2008 financial crisis, European policymakers and economists acknowledge that some banks and other financial institutions could have hidden vulnerabilities.

In September, Britain’s pensions industry was suddenly in critical danger when market interest rates surged because of a change in government policy. The Bank of England quickly intervened to stem the crisis by buying government bonds. Still, the sudden jolt left analysts, traders and policymakers wondering whether something could break in markets elsewhere.

In the United States, Silicon Valley Bank’s collapse this month, which resulted in part because it had badly managed its exposure to rising interest rates, answered that question in the affirmative. In Switzerland, which is not part of the eurozone, the demise of Credit Suisse and its acquisition by rival UBS on March 19 followed management missteps over the years, and these problems were put in sharp relief by the run on bank stocks in the United States.

It’s still an open question what vulnerabilities may be lurking within the eurozone’s financial system. Despite the tumult in the banking sector, E.C.B. policymakers raised interest rates for a sixth consecutive time this month in an effort to combat high inflation. The European Central Bank has executed the fastest pace of monetary policy tightening in the bank’s two-and-a-half decade history, as rates have risen sharply around the world.

Article source: https://www.nytimes.com/2023/03/27/business/eu-banks-deutsche-bank.html