Investors are freaking out over European banks

Investors are freaking out over European banks

The world once again is getting a bit nervous about the health of big banks based in Europe. Not only are bank stocks currently plummeting at what many feel is an alarming pace, investors are now making bets that some banks might even default on their debt should the global economy sink into a recession or if the crash in oil prices deepens.

On the other side, the cost to insure banks like Deutsche Bank’s (DB) debt has now skyrocketed 182% over the past three months alone to the highest level since 2011’s sovereign debt crisis, according to FactSet.

Of course, the current issues in banking do not even close to the 2008 crisis at this point. This is because the big banks in the U.S. and Europe have gotten much stronger since that 2008 meltdown and a little smarter.

Even with that said, banks are getting smacked down this year. With shares of institutions like Bank of America showing numbers down 27% this year alone and other banking giants like Goldman Sachs is off 18% people are starting to wonder. Especially when you look at the the Dow which is only is down “to only” about 8%.

European banks have done even worse, with the Euro STOXX bank index plummeting a whole 24% despite a big rebound Wednesday. Deutsche Bank’s German-listed shares soared nearly 13% on Wednesday, but remain down by one-third this year so far.

So why are banks in such a downward spiral? Here’s why:

Recession + oil crash worries

First, investors are trying really hard to shield against the increased threat of a global recession. Many feel that banks including the big European ones that rely on more risky trading revenue instead of more reliable deposits, could suffer should things go south.

 

The other big driver is the crash in commodities recently, namely oil. Many energy companies took on of mounds of debt when oil was trading at about $100 a barrel. Now that it’s at around $28,  we see many energy loan defaults on the rise and more than a dozen companies have filed for bankruptcy.

Many feel that in a nutshell, big banks haven’t done enough to brace for the coming storm of the large number of oil defaults that we could see if oil stays below $40 for much longer.

If that isn’t enough, central bankers are also making investors little worried. As U.S. bank stocks rallied last year on the hope that the Federal Reserve would significantly raise rates in 2016 people got hopeful. The higher rates give banks more wiggle room to make money on the difference between the interest they pay out on deposits and then what they charge on loans.

it looks however that the 2016 market turmoil has only lowered the chances that the Fed raises rates much this year. In fact, global central bankers are aggressively moving in the opposite direction and that is cause for worry. The European Central Bank is currently printing money and has hinted that they will provide even more stimulus, while the Bank of Japan shocked the markets by introducing negative interest rates.

But some believe the financial freakout is just being blown out of context because big banks are way healthier than they were back in 2008. .

Even in a worst-case scenario, many say that the big banks could easily swallow a write down of all their energy loans by using just one quarter of their profits. It seems like an easy fix but is that the right move?

What do you think? Is this a disaster waiting to happen?

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