Banking industry sees another shock as share prices of global giant Deutsche Bank drop

OAKLAND - The banking industry suffered another shock Friday, as global financial giant Deutsche Bank saw a sharp drop in stock prices, closing down 8.5% after falling as much as 14% during trading.

Following a European Union summit in Brussels Friday, German Chancellor Olaf Scholz spoke about Germany's largest lender, trying to calm fears.

"There is no reason to worry," said Chancellor Scholz, "Deutsche Bank has thoroughly modernized and reorganized its business and is a very profitable bank."

Deutsche Bank has turned in 10 straight quarters of profit, however, its past has been plagued by troubles according to Anat Admati,  Professor of Finance and Economics at Stanford University Graduate School of Business.

"The banking system is very large. And because it's large, there are only so many opportunities. So it ends up being very competitive. And the only way to get ahead is just to take a lot of risk," said Admati.

Admati says the underlying concerns about Credit Suisse and Deutsche Bank differ from the recent troubles of the smaller U.S. banks First Republic, Silicon Valley Bank and Signature Bank, which had investment losses closely linked to U.S. interest rate hikes.

"Deutsche Bank and Credit Suisse, they're a different animal because they are very global, very, very large. And very, what they call systemic, meaning very connected to a lot...they have their tentacles in a lot of places," said Professor Admati.

Admati says concerns about Deutsche Bank started years ago.

"Deutsche Bank had legal problems, money laundering, fraud, you name it, it just had some of losing businesses," said Admati. "They fund most of what they do, overwhelmingly and in all kinds of complicated ways, with debt. So they are incredibly, heavily indebted."

European Union banking officials say the overall financial system is healthy, due to tougher rules requiring banks to keep more cash on hand to cover deposits.

If confidence in Deutsche Bank declines and leads to a government bailout, Admati says that would not fix what she says is a need for greater industry oversight.

"The problem is also that when we always bail them out, we just never clean up the system," said Admati.

Jana Katsuyama is a reporter for KTVU.  Email Jana at jana.katsuyama@fox.com and follow her on Twitter @JanaKTVU or Facebook @NewsJana or ktvu.com.