Japanese and Australian banks picked up the baton from their European peers, pulling the two bourses — the only two major Asian markets trading on Tuesday morning — sharply lower.
Nomura led Japan’s meltdown, dropping 8 per cent within 20 minutes of the market opening. Big commercial banks Sumitomo Mitsui and Mitsubishi UFJ Financial were off 7 and 6.7 per cent respectively. Australian banks also fell sharply.
In early morning trading the Nikkei 225 was down 3.9 per cent, having been off by as much as 4.2 per cent, and Australia’s ASX 2 per cent.
Asia’s declines came after Deutsche Bank led a rout in global bank stocks on Monday as mounting concerns over the global economy, turbulent markets and sliding energy prices morphed into worries over the health of parts of the financial system.
The Stoxx 600 index of European financial institutions fell 5.6 per cent on Monday — its second-worst one-day loss since the eurozone crisis — to take its loss this year to over 24 per cent.
Deutsche Bank was the biggest victim, with its shares sliding more than 10 per cent at one point, and closing down 9.5 per cent — its lowest level since at least 1999. Deutsche has one of the weakest capital ratios among large global banks.
Riskier European bank bonds also fell sharply, reflecting concerns that some creditors could be forced to shoulder losses if banks run into trouble.
In the US, the S&P’s financial institutions index slid 3 per cent by midday in New York, with Morgan Stanley and Goldman Sachs each falling more than 6 per cent. The gauge is now in bear market territory — typically defined as a 20 per cent drop or more from the recent high.
“This is shoot first, ask questions later,” said Ewen Cameron Watt, senior director at the BlackRock Investment Institute. “Banks are mostly in reasonable shape but there are some stresses.”
The exodus from bank stocks rippled through global equity markets, pushing the FTSE World index down 1.8 per cent and sending investors scurrying for the relative safety of government debt, which enjoyed a strong rally on Monday.
The US 10-year Treasury yield, which moves inversely to price, tumbled 7 basis points to a one-year low of 1.76 per cent, the German 10-year Bund yield fell 8bp to just 0.22 per cent, and the equivalent UK Gilt yield slid 15bp to 1.41 per cent.
Deutsche Bank has emerged as a flashpoint in the current bout of concerns over the financial system. The value of its equity tumbled below €20bn on Monday, sending the cost of insuring against the German bank defaulting on its debt to the highest since the eurozone crisis, and even higher than at the peak of the global financial crisis.
Shares in Germany’s Commerzbank were also hit hard, falling 9.5 per cent.
Some analysts said the recent rash of concerns over banks was exaggerated. “There is a disconnect between pricing and the way the industry’s fundamentals are going, which have not weakened in any meaningful way,” said Pri da Silva, an analyst at CreditSights in New York.
“A reconnection should happen over time, but will it happen tomorrow? I doubt it. I don’t think people will be brave enough to step in, even though it’s a great buying opportunity,” he said.
Some investors argued the Deutsche Bank rout looked particularly overdone. “You have to torture their book value to justify the price now,” said Matt Peron, managing director of global equity at Northern Trust.
Yet European bank investors are concerned that regulatory demands to strengthen balance sheets may require raising fresh capital from shareholders. Negative interest rates also make it hard for banks to profit from the difference between the price at which they borrow and at which they lend.
Regulatory inquiries into the state of bad loans across the eurozone have also prompted fears that the continent’s weaker banks may be forced to recognise losses sooner than expected.
US banks’ fourth-quarter results largely met expectations, but analysts said decent fundamentals had been overwhelmed by concerns over slowing growth and the collapse in oil, which have fuelled bets that the Federal Reserve will be reluctant to push up interest rates again. Higher rates are crucial for the big banks, allowing them to earn a thicker spread between the price of their assets and the cost of their funds.
There are also concerns that this year’s round of stress tests in the spring — a key reform of the Dodd-Frank Act of 2010 — will be tougher than before. The Fed confirmed at the end of last month that its “severely adverse” scenario will call for a bigger rise in unemployment, a deeper economic trough in Europe, a harsher sell-off in markets and negative short-term interest rates.
The Fed’s instructions “have certainly upped the stress level”, said Susan Roth Katzke, banks analyst at Credit Suisse.
By Robin Wigglesworth, Ben McLannahan & Dan McCrum