Frankfurt Letter

Frankfurt letter, week beginning Feb. 15

A new Lehman Brothers moment in Europe banking sector?

The European banks, which as early as 2015 were considered to be one of the safest investments for investors, are now facing a very challenging situation as concerns over a global slowdown have markedly increased.

However, the most important issue from last week was the turmoil which deeply affected the banking sector in Europe. 

The European banking sector has recorded its worst performance since 2008. The major European banks are already stretched with global economic concerns within the banking system. 

Europe’s biggest banks; Deutsche Bank, Commerzbank, UniCredit and Credit Suisse have suffered great losses. German bank Deutsche Bank is leading the doomsday procession with a stock price that has fallen below the lowest levels since the financial crisis.

Deutsche Bank shares trading in Frankfurt was down more than 30 percent since the beginning of the year, and the company’s market capitalization erased almost 10 billion euros. 

The losses led to serious concerns in the markets and investors were once again scared off of European banks. 

Is the European banking sector facing a new Lehman Brothers moment? It seems not yet. But some market participants questioned if the financial world was on the brink of another Lehman Brothers moment.

The European Central Bank (ECB) is not expected to step in to help just yet, but if the situation worsens further, the ECB’s intervention is one possible scenario in the markets.

Consequently, the markets will continue to monitor developments in European banks. 

ECB is likely to remain dovish in the coming months.  At the ECB's first monetary policy meeting this year, the ECB president Mario Draghi, signaled the central bank would ease policy further at its next meeting, in March to cover fading growth and inflation considered to be too low. 

"The Governing Council will review and possibly reconsider its stance when it meets in March," Benoit Coeure, executive board member of the ECB said.

The investors and markets await ECB’s policy meeting on March 10, but before this, Draghi's speech which will be held in Brussels on Feb. 15, is also eagerly awaited by the markets. 

16 Feb,2016