Stock market performance, why don’t the markets believe in central banks?

From the United States to Switzerland. From Switzerland to Germany. Up to France. The contagion of the banking crisis is only just beginning. The crisis of confidence in the system is full-blown, the attempts of central bankers to reassure the markets on the solidity of the sector have failed. And speculators confirm that they are much faster than regulators by putting the most exposed banks in check. After Silicon Valley Bank and Credit Suisse, Deutsche Bank and Société Générale ended up in the crosshairs: since the beginning of the year, they have lost respectively 25% and 19% of their value. The price of shares falls relentlessly, while the cost of credit default swaps, the financial instrument that insures investors in the event of bankruptcy, rises. A real thermometer of the risk perceived by the market.

Triggering the alarm on the two banking giants is their exposure to AT1 bonds, the ones Swiss regulators had no problem wiping out overnight to ensure Credit Suisse’s bailout.

The European Central Bank has hastened to distance itself from the Confederation by repeating like a mantra that the protection of bondholders – in the event of a bank failure – will always be higher than that of shareholders. But the rules of finance are now global. And the mechanism implemented by Bern to save the bank is a precedent that no investor has the courage to ignore.

The shower of AT1 bond sales cannot be explained otherwise: a vicious circle that fuels the capital problems of the banks. The awareness that bonds can be canceled at any moment has prompted investors to ask for significantly higher yields: those of Deutsche Bank have exceeded 22%. A price that is too high which adds to the race in interest rates. And the pressure on the robustness of business models increases.

A perverse mechanism which, if not stopped decisively by the European regulator, risks degenerating into a Lehman Brothers two. Except that unlike fifteen years ago, the liquidity in circulation has tripled. Translated: the impact on the real economy of a general bankruptcy would be so strong as to make the 2008 crisis seem like a sweet memory.