Dhe share prices of the German banks also started with losses on Friday. Deutsche Bank shares cost only EUR 8.30 at times on Friday morning, and investors paid EUR 9.75 for them on Wednesday. The Commerzbank share also fell another 3 percent to EUR 7.10 after one hour of trading on Friday. Dax and M-Dax, on the other hand, opened almost unchanged. The price losses of the banks were therefore a mystery. On Thursday, Deutsche Bank’s share price collapsed by a good 12 percent and Commerzbank’s by almost 12 percent, which was unusually severe.
Competitors of the German banks such as BNP Paribas from France or Santander from Spain had “only” lost 5 and 3 percent on Thursday. There was no special news about the German banks that would explain the above-average price losses. On the stock exchange it was said that investors feared a recession and then high loan defaults by the banks. In addition, the yield on federal bonds has fallen again somewhat, and the turnaround in interest rates towards rising yields that has begun could be smaller than expected. Higher yields are mostly good for banks because they can issue their new loans at higher interest rates. However, if the interest rate increases are too significant and rapid, the bonds in the portfolio lose value and the price losses weigh on profits.
Good news for Deutsche Bank came from the United States on Friday morning. According to the results of the Fed’s annual stress test, the major banks operating in the USA, which also include Deutsche Bank’s American subsidiary, are well prepared for an economic crisis. In the scenario simulating a recession, the 34 banks audited maintained an average capital ratio of 9.7 percent, more than double the required level, the Fed said on Thursday evening German time. The subsidiary of Deutsche Bank, which had failed the test several times in recent years, even had the highest capital ratio of 22.8 percent, while the American bank Huntington Bancshares had the lowest at 6.8 percent. At least 4.5 percent would have been required.
Since 2020, banks can no longer fail
All major American banks such as Citigroup, Bank of America, JP Morgan, Goldman Sachs, Wells Fargo and Morgan Stanley were audited, as well as seven subsidiaries of European institutions such as Barclays, Santander and Credit Suisse. The crisis-ridden Swiss bank achieved a capital ratio of 20.1 percent with its American subsidiary.
This year’s test scenario was designed by the US central bank before the outbreak of the Ukraine war and the sharp rise in inflation. Among other things, it was examined to what extent credit institutions could cope with a slump in the markets for commercial real estate and corporate bonds. The Fed simulated a recession with a 3.5 percent slump in economic output and an unemployment rate of 10 percent. In the scenario, prices for commercial real estate collapsed by 40 percent.
As a consequence of the financial crisis of 2008, the US Federal Reserve tests every year how the large financial institutions active in the USA would cope with an economic crisis. Deutsche Bank failed in 2015, 2016 and 2018, and Credit Suisse only got through in 2019 subject to conditions. Since 2020, however, the institutes can no longer fail because the Fed has changed its test system. Instead, the supervisors determine the amount of an equity buffer for each bank individually, which it must create in addition to the minimum requirements. The amount of this buffer depends on the extent of the losses that the financial institutions post in the test scenario. Only after the test do the banks know how much excess capital they can distribute to their shareholders in the form of dividends or share buybacks. They are only allowed to publish their dividend plans after the market close next Monday.