Wider indicators of financial market stress were also flashing warning signs, with the euro falling against the dollar, bond yields sinking and the costs of insuring against bank defaults surging despite efforts by policymakers worldwide to reassure investors.
“Underlying sentiment is still cautious and in this environment no one wants to go into the weekend risk-on,” said Nordea chief analyst Jan von Gerich.
“It’s very volatile and it’s too early to say things will calm down.”
European banks’ Additional Tier 1 debt (AT1) – a $275 billion market which was plunged into the investor spotlight during the rescue of Credit Suisse AG – also came under further selling pressure.
“The developments in the AT1 market mean that most European banks are incentivized at this point to issue common equity, which is diluting for shareholders and also the reason why banking stocks are being reset lower,” said Peter Garnry, head of equity strategy at Saxo Bank.
Amid the market volatility, European policymakers voiced support for the continent’s banks, with German Chancellor Olaf Scholz, French President Emmanuel Macron and European Central Bank chief Christine Lagarde all asserting on Friday that the system was stable.
Their backing came as Deutsche Bank shares fell for a third day, dropping more than 12% after a sharp jump in the cost of insuring its bonds against the risk of default.
Shares in Germany’s largest bank have lost a fifth of their value so far this month and the cost of its five-year credit default swaps (CDS) – a form of insurance for bondholders – jumped to a four-year high on Friday, based on data from S&P Market Intelligence.
“Deutsche is a bank that has had its own issues with regulators, it has also seen profit volatility and gone through a restructuring,” said Paul van der Westhuizen, senior strategist at Rabobank.
“There is a fundamental difference in that Deutsche has returned to profitability over the last few quarters, whereas Credit Suisse did not have a profitable outlook for 2023 at all,” he added.
Deutsche Bank declined to comment.
The pain was spread across the sector, with the index of top European banks falling 5.1% and British lenders losing 4%, down for a third straight session.
The fresh price falls in Europe came as investors were looking to see how far U.S. authorities would go to shore up the banking sector, particularly fragile regional lenders.
U.S. Treasury Secretary Janet Yellen said on Thursday that bank regulators and the Treasury were prepared to make comprehensive deposit guarantees, as they did at failed Silicon Valley Bank (SVB) and Signature Bank.
Shares of major U.S. banks nevertheless slipped on Friday, with JPMorgan Chase & Co and Bank of America down 1% in opening trade and Morgan Stanley losing 2.9%.
Regional lenders also declined, with First Republic Bank , PacWest Bancorp, Western Alliance Bancorp and Truist Financial Corp between 2% and 5% lower.
The global banking sector has been shaking since the sudden collapse this month of SVB and Signature Bank.
Policymakers have stressed the turmoil is different from the global financial crisis 15 years ago, saying banks are better capitalized and funds more easily available.
But the worries spread quickly, and on Sunday UBS was rushed into taking over Swiss rival Credit Suisse after it lost the confidence of investors.
Swiss authorities and UBS are racing to close the takeover within as little as a month, according to two sources with knowledge of the plans.
Separate sources told Reuters that UBS has promised retention packages to Credit Suisse wealth management staff in Asia to stem a talent exodus.
Brokerage group Jefferies said UBS’ acquisition of its former rival would change an equity story based on a lower risk profile, organic growth and high capital returns.
“All these elements, which is what UBS shareholders bought into, are gone, likely for years,” it said.
UBS shares were down 5% on Friday and its five-year CDS shot up 14 basis points.
The way Credit Suisse was rescued has also ignited broader worries about investors’ exposure to the banking sector. The decision to prioritize shareholders over Additional Tier 1 (AT1) bondholders rattled the $275 billion AT1 bond market.
These convertible bonds were designed to be invoked during rescues to prevent the costs of bailouts falling onto taxpayers.
As part of the deal with UBS, the Swiss regulator determined that Credit Suisse’s AT1 bonds with a notional value of $17 billion would be wiped out, stunning global credit markets.
Deutsche Bank and UBS AT1s were down around 6 and 2.5 cents in price, respectively, on Friday, according to Tradeweb data.
Standard Chartered Chief Executive Bill Winters said on Friday the wipeout of Credit Suisse bondholders had “profound” implications for global bank regulations.
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