BERLIN - Shares in Deutsche Bank swung wildly on Friday, touching a record low before roaring back to life, amid speculation about the stability of Germany's biggest bank and the European financial system.
Having initially fallen 8 per cent, the shares rushed higher to close more than 6 per cent higher on hopes the bank will be able to negotiate down the massive cost of settling a U.S. investigation.
The U.S. government had been asking for $14 billion to settle claims over the bank's sales of mortgage securities, complex investments that were one of the causes of the global financial crisis in 2008. The U.S. government says Deutsche Bank was among several companies that misled investors about the quality of these investments.
That price was so huge — just below the bank's total market value as of Friday — that it raised speculation that Deutsche Bank would have to raise new capital, diluting the value of its shares.
Those concerns, as well as broader worries about the bank's ability to turn around its ailing businesses, hammered its shares in recent weeks. They closed up 6.4 per cent at 11.57 euros — a strong close after earlier in the day trading below 10 euros for the first time ever.
The rally was prompted by an unsourced report by Agence France Press that the U.S. government had agreed to a settlement worth $5.4 billion. Deutsche Bank declined to comment on the report.
Investors are likely "getting cold feet given the possibility of more news over the weekend that could easily send the shares soaring come Monday," said Chris Beauchamp, chief market analyst at IG.
With or without a deal with U.S. authorities this weekend, Deutsche Bank faces questions about its business that will keep investors on edge. It has struggled to restructure its business, is cutting thousands of jobs, and is struggling to make a profit due to low interest rates, which reduce the amount of money it can make by lending.
Concern about its health was apparent in how quickly investors pounced upon a report that about 10 hedge funds had pulled investments they were keeping with Deutsche Bank. The funds were using the bank to clear complex trades, and the move suggests they were wary of leaving their money with Deutsche Bank.
The report saw the shares plunge, prompting Deutsche Bank CEO John Cryan to issue an open letter to employees in which he says the news about the hedge funds is "causing unjustified concerns" and should be seen in the wider context of the bank's 20 million clients.
"It is our task now to prevent distorted perception from further interrupting our daily business. Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust."
The bank, he insisted, is fundamentally strong, is meetings its capital requirements, is profitable and has "an extremely comfortable buffer" when it comes to liquidity, with reserves of more than 215 billion euros ($241 billion).
"There is therefore no basis for this speculation," Cryan said.
He noted that other banks had paid far less than $14 billion to settle similar U.S. investigations. Goldman Sachs, for example, paid $5 billion.
At the ground level, the bank's customers seemed unfazed.
"Deutsche Bank remains Deutsche Bank — it's a big bank in the world and in Germany," said Berlin property developer Harry van Caem at a downtown branch. "I think the government will not abandon let them, it always had a good name and there will be a solution."
The wider worry is that Deutsche Bank may prove to be a "Lehman moment" for the European banking sector. In September 2008, the U.S. government made clear that it was not going to bail out investment bank Lehman Brothers when it was in huge difficulty. Because Lehman was connected to many other banks, the decision to let it fall proved fateful: it triggered a collapse of confidence in the global financial system that pushed the world economy into its deepest recession since World War II.
"German Chancellor Angela Merkel says there will be no state bailout, but this might be a case of 'famous last words', as the history of banking crises often shows that major banks cannot be allowed to fail for fear of systemic risk affecting the financial system and negatively impacting the real economy," said Neil MacKinnon, global macro strategist at VTB Capital.
One major difference to 2008 is that the European Central Bank has a range of tools to shore up liquidity in banks under its jurisdiction, the 19 countries that use the euro. As a result, Deutsche Bank should be able to avoid a funding squeeze and a potential run on deposits of the kind Lehman suffered.
MacKinnon says the European banking sector is nevertheless likely to remain under stress given the absence of much-needed efforts to restructure and raise money.
"It is insufficient just for the central bank to provide unlimited liquidity," he said. "As a result, investors need to be mindful of the potential for a market upset in the near term."
Pylas reported from London.