LONDON: Bank shares tumbled on Friday, jolting stock markets as fears about the health of the financial sector resurfaced, with Deutsche Bank now in the eye of the storm.

Markets had rallied earlier this week after financial authorities took steps aimed at preventing contagion from the collapse of US regional lenders earlier this month.

But sentiment has soured following decisions by central banks in the United States, Britain and Switzerland to hike interest rates despite concerns about the impact of the monetary tightening on banks.

Fears of contagion led to the takeover of embattled Swiss bank Credit Suisse by domestic rival UBS on Sunday.

The focus has now turned to another major European lender, Deutsche Bank, whose shares nosedived by as much as 14 percent on Friday as the cost of insuring against the bank defaulting on its debt spiked. It closed 8.5 percent lower.

The German lender returned to financial health last year following a major restructuring after years of problems.

European officials lined up to reassure the markets.

German Chancellor Olaf Scholz said after an EU summit that “there is no reason to be concerned” about Deutsche Bank as the lender is “very profitable”.

European Central Bank President Christine Lagarde told EU leaders that the single currency area’s banking sector is “resilient because it has strong capital and liquidity positions”, according to an EU official.

But City Index analyst Fiona Cincotta told AFP that the selloff in bank shares has highlighted “just how fragile sentiment is towards the sector”.

“As central banks continued hiking rates this week the outlook is looking increasingly shaky,” she told AFP, adding that “Deutsche Bank has come under the spotlight as a possible target for contagion risk.” European stock markets finished another turbulent week sharply lower, with London down 1.3 percent while Frankfurt and Paris both shed around 1.7 percent.

Wall Street’s three main indices opened lower but the Dow and S&P 500 steadied around lunch time.

Shares in US financial giant JPMorgan Chase and Citigroup were down around two percent while Bank of America fell 0.5 percent. In Paris, Societe Generale sank more than six percent and BNP Paribas dropped more than five percent.

UK bank Standard Chartered also tanked by more than six percent in London while Barclays was down around four percent.

Concerns that the turmoil could trigger a recession sent oil prices sliding more than two percent.

Share prices in energy majors including BP, Shell and TotalEnergies also tanked.

Published in Dawn, March 25th, 2023