Investor concerns resurfaced as European banking shares experienced significant declines following the collapse of two US banks and the hasty takeover of Swiss giant Credit Suisse.

Deutsche Bank, in particular, saw its shares drop by 14% at one point on Friday, with other lenders also recording substantial losses.

While stock markets in Germany, France, and the UK saw sharp declines, the US stock market was largely unaffected. Despite early losses, the Dow Jones Industrial Average and S&P 500 both experienced gains, and the Nasdaq ended the day higher.

However, banks such as JPMorgan Chase and Morgan Stanley saw a drop in their share prices. European banks that were hit by investor sell-offs included Commerzbank, Societe Generale, and Standard Chartered.

Although Deutsche Bank recovered from its steepest losses, its shares still closed more than 8% lower.

According to Russ Mould, investment director at AJ Bell, Deutsche Bank’s share price drop and an increase in the cost of insuring against a possible default by the bank suggest a “wider loss of confidence in the banking sector.”

“There’s a gathering fear that central banks may have overdone it with interest rate increases, having left them too low for too long,” he said.

During the 2008 global financial crisis and again in 2020, central banks reduced interest rates in an attempt to stimulate economic growth.

However, in the past year, these rates have been raised significantly by authorities to control rising inflation.

These rate increases have resulted in a decline in the value of bank investments and have been linked to recent bank failures in the United States.

The banking sector has seen a drop in share prices, and prominent investors have warned that these collapses are indicative of more profound problems in the system, with additional pockets of distress yet to surface.

The potential for a recession has also increased due to higher interest rates, which, according to Russ Mould, investment director at AJ Bell, could make it challenging for banks.

Efforts to calm market worries have been made by central banks and governments. German Chancellor Olaf Scholz defended Deutsche Bank at a news conference, highlighting its profitability and modernized business model. Bank of England governor Andrew Bailey also reassured the public that the UK banking system was “safe and sound”. However, conflicting statements from US authorities regarding guaranteeing all bank deposits have led to confusion and doubts over the restoration of stability to the sector.

US Treasury Secretary Janet Yellen recently held a Friday meeting with regulators on financial stability, while the Federal Reserve reported an increase in the use of emergency lending programs for banks. Additionally, Bloomberg News reported that UBS and Credit Suisse were being investigated by the US Department of Justice for allegedly helping Russian oligarchs avoid sanctions.

The financial turmoil stemming from the bank failures has caused uncertainty about how much higher interest rates might go. Federal Reserve Chairman Jerome Powell stated that if the banking panic continues to weigh on lending and slows economic growth, the bank may not raise borrowing costs much more. However, St. Louis Fed President James Bullard, who is not currently on the rate-setting committee, thinks the panic will subside, leading to higher rates than the roughly 5% currently expected.

Joachim Nagel, President of Germany’s Bundesbank, believes that central banks should continue to raise rates due to still rampant inflation. Although he did not comment on Deutsche Bank specifically, he acknowledged that market turmoil is expected after the failures of Silicon Valley Bank and Signature Bank in the US and the UBS takeover of Credit Suisse.

“In the weeks after such interesting events, it is often a bumpy road,” he said.