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Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
This weekend marks the one-year anniversary of the scariest moment in a decade for Europe’s banking sector.
It was a testing period. US regional banks that frankly most Europeans had never heard of, but which were the size of several continental national champions, were dying as sharp rises in interest rates took a heavy toll.
Suddenly, the pain spread to Europe. Credit Suisse, long hampered by a long list of cartoonish scandals ranging from senior espionage to Bulgarian cocaine-smuggling rings, was dragged into a shotgun wedding with its arch-rival UBS over a tense weekend.
A year later, bankers and investors still marvel that, despite all that drama, the earth continued to spin on its axis, it was far from a Lehman Brothers moment. Instead, a banking giant went pop, was swallowed up by the bank on the street, and European markets survived to fight on. The vibe was more “what just happened?” than “running up the hill”.
But after the end of the Credit Suisse weekend, another strong danger point arose. This occurred the following Friday, March 24, and involved a market attack on Deutsche Bank. As we all remember the high-stakes “CS Weekend,” as it is often known, we must learn the lessons from this separate drama.
The root of the problem was, as with many other things in life, Twitter, as the social media cesspool X was known at the time. There, a disturbing-looking graph began to circulate, showing that the cost of purchasing of insurance against a debt default by the German bank had soared.
The finer points of the credit default swap market have been somewhat lost on the social media public. Few have stopped to consider that it is often clumsy and illiquid enough for a person purchasing a contract to generate a dramatic increase in price, even without necessarily owning the underlying bond covered by the protection contract. (This so-called “naked” CDS trading was banned, for this very reason, in relation to European government bonds during the Eurozone debt crisis.)
Suddenly the hunt for the weakest link in the European banking system began. Deutsche Bank, which has had its fair share of shaky moments over the years, seemed to rise to the occasion. Its share price began to collapse, losing 14% on the day at its most extreme point. It is important to mention here that nothing new, beyond the rather unstable CDS chart, had gone wrong with the bank at this point. But in a feverish week, it didn’t take much for online speculation to pick up pace.
Looking back, it all seems silly. Deutsche Bank’s share price is now around 70% above that day’s low point. But the voices on social media are powerful. One of the (many) factors that put pressure on Credit Suisse in the months leading up to its fall was an alarmist tweet that prompted a good number of customers to withdraw their funds from the bank.
As one banker recently told me, the reason this was so painful for Deutsche Bank, and terrifying for everyone else, is that Credit Suisse’s funeral was pre-packaged. Regulators have gotten pretty good at this since 2008, as demonstrated by U.S. authorities’ handling of the sudden death of Silicon Valley Bank and others earlier this month. In this case the Swiss authorities had a plan and they executed it. Brutal, but rapid, decisive and with limited systemic risk. For Deutsche Bank there was no such plan, which is rather too big for most other banks to digest quickly. Some skittish investors were reluctant to hold onto their shares before the weekend, just in case. Other banking stocks, in Europe and the United States, were spooked.
Deutsche bankers were, with good reason, genuinely alarmed and shocked by the speed of the stock’s decline. The bank faced a dilemma: should it put the CEO or other senior executives in front of a lectern to say everything was fine? Or would it make everything worse? Some were doubly nervous when German Chancellor Olaf Scholz addressed the issue that day. Asked whether Deutsche Bank was the new Credit Suisse, he told reporters that there was “no reason to worry.”
The bank’s shares closed 8% lower on the day – a recovery from the nadir – suggesting that the fever fortunately subsided quickly and that Scholz may even have helped. But senior bankers should heed the message of that rather difficult episode: nonsense on the Internet matters. It shouldn’t, but it does. Likewise, investors should remember that sometimes it is just that: nonsense.
It’s impossible to say for sure what would have happened if Deutsche Bank had had its top brass come out to tell the world that all was well, nothing to see here. But it’s reasonable to imagine that a mistake could have worsened a really bad day for the bank’s shares. To his credit, he held his nerve and maintained a dignified silence, preventing the following Monday from being potentially sad. The next time a bank goes into crisis, and sooner or later this will happen, we should remember what went right and what went wrong that day.
katie.martin@ft.com