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Scholz dismisses fears over Deutsche Bank

German chancellor seeks to reassure markets as banking stocks tumble amid fears of contagion

By Simon Foy and Matt Oliver

Olaf Scholz has been forced to defend the financial health of Deutsche Bank after renewed fears of contagion in Europe’s banking system sparked a sell-off in its shares. Germany’s chancellor dismissed comparisons between the country’s largest lender and Credit Suisse, which had to be rescued by Swiss rival UBS at the start of the week. Mr Scholz said Deutsche Bank was “a very profitable bank”. He added that “the capital adequacy of European banks is robust”.

OLAF SCHOLZ has been forced to defend the financial health of Deutsche Bank after renewed fears of contagion in Europe’s banking system provoked a sell-off in its shares.

The German Chancellor dismissed comparisons between the country’s largest lender and Credit Suisse, which had to be rescued by Swiss rival UBS at the start of the week.

Mr Scholz said: “Deutsche Bank has fundamentally modernised and reorganised its business, and is a very profitable bank. There is no reason to be concerned about it.”

He added that “the capital adequacy of European banks is robust, thanks to the work over the past few years and also thanks to the efforts of the banks themselves”.

Attempts to provide reassurance came after shares in Deutsche fell by as much as 14pc yesterday, while its credit default swaps, used to insure against the risk of it not paying debts, jumped to a five-year high.

European markets tumbled again yesterday, with bank stocks dragging London’s FTSE 100 index down 1.3pc.

Shares in Standard Chartered, Barclays and Natwest fell 6.4pc, 4.2pc and 3.6pc respectively.

Stock markets and the global banking industry continue to feel the aftereffects of the collapse of Silicon Valley Bank (SVB) and the near death of Credit Suisse. There are concerns that governments and regulators have failed to do enough to stem a crisis of confidence.

Christine Lagarde, president of the European Central Bank (ECB), told European Union leaders that the euroarea banking sector is strong despite the continued market turbulence.

Janet Yellen, the US Treasury secretary, called an emergency meeting of the country’s top financial regulators, which was held behind closed doors.

Bond traders are scrapping bets that the Federal Reserve will raise interest rates again in May. The US central bank and the Bank of England both raised rates this week despite the turmoil.

Like many European lenders, Deutsche Bank’s share price has slumped in recent weeks following the failure of SVB. The fall yesterday means the stock has lost more than a quarter of its value in the past month. It closed down more than 8pc in Frankfurt on Friday, having pared some earlier losses.

Commerzbank, another major German lender, and France’s Société Générale fell 5pc and 6pc respectively.

Separately, Credit Suisse and UBS are reportedly facing investigation by American authorities into their work for Russian oligarchs, amid concerns that bankers may have helped their clients evade sanctions.

The Swiss banks, which recently agreed a $3bn (£2.5bn) merger as Credit Suisse teetered on the brink of collapse, are said to be among lenders that were recently sent subpoenas by the US Department of Justice (DOJ).

It is part of an investigation into whether financiers helped oligarchs with links to the Kremlin evade sanctions, according to Bloomberg.

Credit Suisse has long had a reputation for providing banking services to Russia’s elite. The bank looked after as much as $60bn for Russian clients at its peak. It discontinued business with them last May, three months after the outbreak of the Ukraine war. At that point, it held roughly $33bn for Russian individuals, or 50pc more than UBS, Bloomberg reported.

The reported subpoenas are the latest effort by the Doj’s new “Kleptocapture” task force – which focuses on tackling kleptocracy – to go after wealthy allies of Vladimir Putin, the Russian president.

Investigators have already swooped on their property, with Joe Biden, the US president, warning oligarchs: “We are joining with our European allies to find and seize your yachts, your luxury apartments, your private jets. We are coming for your ill-begotten gains.”

Both Credit Suisse and UBS declined to comment on the report.

A spokesman for the DOJ was not immediately available for comment.

‘The risk is if there is a knock-on impact from various media headlines on depositor psychology’

‘We have no concerns about Deutsche’s viability or asset marks. To be crystal clear – Deutsche is not the next Credit Suisse’

When Christian Sewing took the reins at Deutsche Bank in April 2018, his promise was simple: to make Germany’s biggest lender more boring.

Once a titan of the banking industry that rivalled Wall Street’s biggest beasts, Deutsche never really recovered from the 2008 financial crisis.

In the face of heavy fines, sluggish performance, sweeping restructuring costs and competition from more agile American rivals, Sewing was forced to return the struggling lender to its roots as a provincial German bank.

Less than four months into the job he announced a radical restructuring plan, which included laying off a fifth of Deutsche’s workforce, closing down large parts of its investment banking division – including equities trading – and setting up a “bad bank” with €74bn (£65bn) of toxic assets.

“What we have announced is nothing less than a fundamental rebuilding of Deutsche Bank through which we are ushering in a new era for our bank,” Sewing said at the time.

After years of pain, the plan appeared to be bearing some fruit. Last year, Deutsche posted profits of €5.7bn – its best performance in 15 years.

But the German lender has become the latest flashpoint in Europe’s banking crisis following a sharp jump in its credit default swaps, which investors buy to protect themselves from a company defaulting on its debts. Shares in the bank fell by as much as 14pc yesterday before clawing back some of the losses.

Analysts were scrambling for reasons to explain the sudden investor flight. Andrew Coombs, at Citigroup, said concerns about Deutsche’s commercial real-estate exposure and a US Department of Justice investigation into banks and Russian sanctions did not appear significant enough to explain the move.

He blamed it instead on an “irrational market”. As with Credit Suisse, “the risk is if there is a knock-on impact from various media headlines on depositor psychology, regardless of whether the initial reasoning behind this was correct or not”, he said.

Indeed, it was contagion fears that drove Credit Suisse into the arms of its fiercest rival last week after customers pulled funds from the scandal-hit bank at a rate of knots, rather than any fundamental concerns about its financial position.

German officials dismissed comparisons between Deutsche and the Swiss lender. Asked whether the German bank was the new Credit Suisse, Chancellor Olaf Scholz said: “Deutsche Bank has fundamentally modernised and reorganised its business and is a very profitable bank. There is no reason to be concerned about it.”

However, amid the market panic triggered by the collapse of Silicon Valley Bank (SVB), Credit Suisse became a target in part thanks to the litany of scandals that befell the bank in recent years.

If the Swiss lender was regarded as the European banking industry’s weakest link, then Deutsche Bank could be seen as the industry’s problem child thanks to its own notorious catalogue of blunders.

The bank’s share price has been on a roller coaster ride for years amid a steady drumbeat of embarrassing scandals and poor financial results.

Over the past decade the German lender has been forced to stump up billions of dollars in fines for money laundering, bond mis-selling, interest rates manipulation, mortgage fraud and sanctions violations, with its Frankfurt headquarters having been raided twice in the past five years.

Deutsche paid up $630m (£515m) to British and US regulators in 2017 for its unwitting role in spiriting roughly $10bn of illicit cash out of Russia between 2012 and 2015, after bank staff missed multiple warning signs of so-called “mirror trading”.

In another case, Deutsche agreed to pay US regulators $150m for “inexcusable” failures to prevent suspicious transactions by the late paedophile financier Jeffrey Epstein, and again for clearing hundreds of billions of dollars for Danske Bank, a lender implicated in one of the largestever money laundering scandals.

Like many other German institutions, the bank was also left with egg on its face when its asset management arm suffered €600m of losses when its shares in payments company Wirecard – which was built on a multibillion-dollar fraud – turned sour in 2020.

And the bank last year opted to settle a class action lawsuit brought by US investors for $26m, after allegations it had failed to carry out proper “know your client” checks on Epstein, Russian oligarchs including Roman Abramovich and businesses with links to Hezbollah, the terrorist group.

“Deutsche Bank has been the subject of repeated scandals, investigations and regulatory enforcements for years,” the complaint filed by investors added.

As part of the settlement, Deutsche denied wrongdoing.

Analysts tried to reassure investors yesterday that Deutsche’s capital and liquidity remained strong.

Stuart Graham of Autonomous Research said: “We are relatively relaxed in view of Deutsche’s robust capital and liquidity positions.

“We have no concerns about Deutsche’s viability or asset marks. To be crystal clear – Deutsche is not the next Credit Suisse.”

Paul de la Baume, senior market strategist at Flowbank, told Bloomberg: “It is a clear case of the market selling first and asking questions later.

“Traders do not have the risk appetite to hold positions through the weekend, given the banking risk and what happened last week with Credit Suisse and regulators.”

On weekends, Sewing is known to enjoy a few beers at a local Greek restaurant in Osnabrück, the city in the north-west Germany where he lives with his wife and four children.

Rather than embarking on his usual 475-mile commute to spend the weekend back home, the 52-year-old might want to stay closer to Deutsche’s Frankfurt HQ in case contagion fears cause any more damage to Germany’s biggest lender.

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