D.German bank share prices also started with losses on Friday. Deutsche Bank shares cost just EUR 8.30 on Friday morning and investors paid EUR 9.75 on Wednesday. Commerzbank stock also fell another 3% to EUR 7.10 after one hour of trading on Friday. Dax and M-Dax, on the other hand, opened almost unchanged. The banks’ price losses were therefore a mystery. On Thursday, Deutsche Bank’s price fell a good 12% and Commerzbank’s by nearly 12%, which was unusually bad.
Competitors from German banks like France’s BNP Paribas or Spain’s Santander lost “only” 5 and 3% on Thursday. There was no special news on German banks that would explain the above-average price losses. On the stock exchange it was said that investors feared a recession and then a high default on loans by banks. In addition, the yield on federal bonds has declined slightly and the initiated turnaround in interest rates towards rising yields may be lower than expected. Higher yields are mostly good for banks because they can issue their new loans at higher interest rates. However, if interest rate increases are too significant and rapid, bonds in the portfolio lose value and price losses weigh on profits.
Good news for Deutsche Bank came from the US on Friday morning. According to the results of the Fed’s annual stress test, the main banks operating in the US, including the American branch of Deutsche Bank, are well prepared for the economic crisis. In the scenario that simulates a recession, the 34 subsidiary banks maintained an average capital ratio of 9.7%, more than double the required level, the Fed said Thursday evening, German time. Deutsche Bank’s subsidiary, which had failed the test multiple times in recent years, even had the highest capital ratio of 22.8 percent, while American bank Huntington Bancshares had the lowest at 6.8 percent. At least 4.5 percent would have been needed.
From 2020, banks can no longer go bankrupt
All major American banks such as Citigroup, Bank of America, JP Morgan, Goldman Sachs, Wells Fargo and Morgan Stanley, as well as seven branches of European institutions such as Barclays, Santander and Credit Suisse were audited. The failing Swiss bank reached a capital ratio of 20.1 percent with its US branch.
This year’s test scenario was drawn by the US central bank before the outbreak of the war in Ukraine and the sharp rise in inflation. Among other things, the extent to which credit institutions could cope with the crisis in the commercial real estate and corporate bond markets was examined. The Fed simulated a recession with a 3.5% decline in economic output and an unemployment rate of 10%. In the scenario, commercial property prices plummeted 40 percent.
As a result of the 2008 financial crisis, the US Federal Reserve tests each year how large financial institutions operating in the US would face an economic crisis. Deutsche Bank went bankrupt in 2015, 2016 and 2018, and Credit Suisse only succeeded in 2019 on terms. From 2020, however, institutions can no longer fail because the Fed has changed its testing system. Instead, supervisors determine the amount of a capital buffer for each bank individually, which it must create in addition to the minimum requirements. The amount of this reserve depends on the extent of losses that financial institutions record in the test scenario. Only after the test do 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 closes next Monday.