Germany's biggest bank buys up its own debts to ease fears
Deutsche Bank moved dramatically yesterday to reassure investors that it - and by extension the Eurozone banking sector - is financially sound.
Germany's biggest bank will buy back about $5.4bn (€4.8bn) of bonds in a mix of euro and dollars as it seeks to allay investor concerns about its finances. The move will cut the bank's debts and demonstrates its access to capital.
Deutsche Bank had to bolster confidence after the cost to its own lenders of insuring their risk hit the highest levels since at least 2002. The German bank is the largest in at least four years to feel compelled to reassure investors that it has enough funds to service its obligations.
"This is a tool Deutsche Bank can use to reduce the panic," said Roger Francis, an analyst at Mizuho International in London.
"It doesn't really address the underlying concern that people have about the bank.
"They need earnings to pay dividends and subordinated bond coupons and that's where the question marks are."
The question mark over Deutsche Bank's earnings applies equally to a raft of banks, and ultimately other businesses, across the Eurozone.
With global growth weak, and potentially slowing further, investors are increasingly waking up to the challenge of trying to generate returns in a low interest rate environment.
That is being compounded for banks by increasingly radical central bank policies that are designed to force lenders to lend.
The most extreme policies include negative interest rates, which means banks are charged money for parking cash overnight with central banks. It's creating a dilemma for banks because in much of Europe businesses and households have become slow to borrow, fearful of owing money in an environment where their own prospects for higher earnings are limited.
As Germany's biggest lender, Deutsche Bank is seen as the canary in the coal mine. Its shares have lost a third of their value since this year began, a sign that the current crisis is striking at Europe's so-called political and economic "core".
Deutsche Bank isn't alone as confidence in banks' abilities to return profits in what looks set to be a long term low growth environment is waning.
Global banks including Citigroup, Bank of America and Credit Suisse have all plunged more than 32pc. The chairman and chief executive officer of JPMorgan Chase, Jamie Dimon, bought $26.6m worth of shares in his bank in a public move to bolster confidence.
European finance ministers, when asked about the negative sentiment at a meeting in Brussels, remained upbeat, citing confidence in the safeguards put in place after Lehman Brothers went under in 2008.
"We have taken precautions to make banks more resilient after the lessons from the financial and banking crisis," Germany's Wolfgang Schaeuble said.
Precautions around European banks now include the Bank Recovery and Resolution Directive and the euro-area's Single Supervisory Mechanism. Under EU laws that took full effect this year bondholders know they are in line for losses - known as a bail-in - before failing institutions can tap taxpayer-funded backstops. (Additional reporting Bloomberg)