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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
This weekend marks the first anniversary of the scariest moment in European banking of the past decade.
It was a testing time. US regional banks that frankly most Europeans had never heard of but were the size of several continental national champions were dying off as the sharp rise in interest rates exacted a heavy toll.
Abruptly, the pain spread to Europe. Credit Suisse, long hobbled by a cartoonishly long list of scandals ranging from C-suite spying to Bulgarian cocaine smuggling rings, was frogmarched into a shotgun wedding with its arch rival UBS over a tense weekend.
One year on, bankers and investors still marvel that, for all that drama, the earth continued spinning on its axis, it was far from a Lehman Brothers moment. Instead, a banking giant went pop, got swallowed whole by the bank over the road, and European markets lived to fight on. The mood was more “what just happened?” than “run to the hills”.
But after Credit Suisse’s weekend demise came another point of high danger. That came on the following Friday, March 24, and involved a market attack on Deutsche Bank. While we all reminisce about that 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 so much in life, Twitter, as the social media cesspit X was known at the time. There, an ominous-looking chart started doing the rounds, showing that the cost of buying insurance against a default on debt by the German bank had rocketed higher.
The finer points of the credit default swaps market were somewhat lost on the social media audience. Few paused to consider that it is often clunky and illiquid enough for one person buying one contract to generate a dramatic spike in the price, even without necessarily owning the underlying bond that the protective contract covers. (This so-called “naked” CDS trading was banned, for precisely this reason, in relation to European government bonds during the eurozone debt crisis.)
Suddenly, it was game on, a hunt for the weakest link in European banking. Deutsche Bank, which has had its fair share of wobbly spots over the years, appeared to fit the bill. Its share price started tanking, shedding 14 per cent on the day at the most extreme point. It is important to remember here that nothing new, beyond the rather flaky CDS chart, had gone wrong at the bank at this point. But in a febrile week, it took very little for very online speculation to gather pace.
Looking back, it all sounds silly. Deutsche Bank’s share price now stands some 70 per cent above its lowest point of that day. But the social media rumour mill is powerful. One of the (many) things that added pressure on Credit Suisse in the months leading up to its fall was an alarmist tweet that prompted a good number of clients to pull their funds out of the bank.
As one banker put it to me recently, the reason this was all so painful for Deutsche Bank, and terrifying for everyone else, was that Credit Suisse’s funeral was pre-packed. Regulators have got quite good at this stuff since 2008, as US authorities’ handling of the sudden death of Silicon Valley Bank and others earlier in the month had demonstrated. In this case, Swiss authorities had a plan, and they executed it. Brutal, but swift, decisive, and with limited systemic risk. No such plan existed for Deutsche Bank, which is rather too large for most other banks to digest in a hurry. Some skittish investors were reluctant to keep hold of their shares ahead of the weekend, just in case. Other bank stocks, in Europe and in the US, were spooked.
Bankers inside Deutsche were, with good reason, genuinely alarmed and shocked by the speed of the drop in shares. The bank faced a dilemma: should it stand the chief executive or other senior staff in front of a lectern to say everything was fine? Or would that make everything worse? Some were doubly nervous when German chancellor Olaf Scholz addressed the issue that day. Asked if Deutsche Bank was the new Credit Suisse, he told reporters there was “no reason to be concerned about it”.
Shares in the bank closed 8 per cent lower on the day — a pickup from the nadir — which suggests the fever eased mercifully quickly and that Scholz may even have helped. But senior bankers should heed the message from that rather fraught episode: nonsense on the internet matters. It shouldn’t, but it does. Similarly, investors should remember that sometimes it is just that: nonsense.
It is impossible to say with any certainty what would have happened if Deutsche Bank had wheeled out its top brass to tell the world that everything was fine, nothing to see here. But it is reasonable to imagine that one slip-up could have made a seriously bad day for the bank’s shares much worse. To its credit, it held its nerve and maintained a dignified silence, preventing the following Monday from being potentially grim. Next time a bank hits the skids, and at some point it will, we should remember what went right and wrong that day.
