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The Looming Threat of 'Bankdemic’

Posted March. 28, 2023 08:07,   

Updated March. 28, 2023 08:07


The specter of a banking crisis that originated in the United States has cast a dark shadow across the global financial landscape, sweeping through Switzerland and engulfing Germany's largest investment bank, Deutsche Bank. Despite reassurances from German Chancellor Olaf Scholz that there is no cause for concern, the tremors of this crisis continue to reverberate. The fact that even major banks with no apparent signs of insolvency become targets is a testament to the extreme levels of investor fear. This has given rise to the term 'Bankdemic,' a portmanteau of 'bank' and 'pandemic,' reflecting this financial anxiety's contagious and far-reaching nature.

Deutsche Bank's stock price took a nosedive on Friday, plummeting over 14% during trading. This was driven primarily by market anxiety rather than inherent issues within the bank itself. Despite boasting a net income of five billion euros (approximately seven trillion won) last year and abundant liquidity, the German bank could not escape the recent crisis's clutches. The collapse of Credit Suisse (CS) and the subsequent devaluation of its hybrid bonds (CoCo bonds) have fueled suspicion toward Deutsche Bank, which holds a significant proportion of these bonds. Hedge funds have also exacerbated the situation by aggressively betting on the decline of banking stocks amid market uncertainty.

The current global banking crisis differs in several ways from the past. Silicon Valley Bank (SVB), for example, primarily invested in U.S. Treasury bonds, typically considered safe assets. Despite its strong financial stability, Deutsche Bank has not been able to escape the crisis, which shows there is no absolute safe haven in this new landscape of crisis. The speed at which fear spreads has also accelerated, as evidenced by the 'digital bank run.' The 40-year-old SVB crumbled in just two days, while the 167-year-old CS fell within a week.

This is why Korea’s financial companies cannot afford to be complacent in the face of the looming 'Bankdemic.' The country's financial system is already riddled with vulnerabilities. The scale of real estate project financing (PF) risk exposure in the secondary financial sector reached a record high of 115.5 trillion won as of September last year. The delinquency rate of real estate PF loans in securities companies soared from 3.7% at the end of 2021 to 8.2% by September last year. Household debt also poses a significant risk as well. The number of high-risk households unable to repay their debts even after liquidating all assets more than doubled within a year, exceeding 615,000 households.

The current crisis shares several unsettling parallels with a pandemic, including the rapid spread of fear, unpredictability, and swift transmission of impact. No one can predict when, where, and how potential crises will materialize. Thus, it is crucial to strengthen the financial sector's stability and implement thorough monitoring of warning signs to prevent the market from succumbing to excessive anxiety. An urgent call to action is required to proactively establish a comprehensive financial quarantine network.