Banking stocks fell again today, with shares in German giant Deutsche Bank knocked by worries that regulators and central banks have not yet contained the worst shock to the sector since the 2008 global financial crisis.

Wider indicators of financial market stress were also flashing, with the euro falling against the dollar, Euro zone government bond yields sinking and the costs of insuring against bank defaults surging despite efforts by policymakers worldwide to reassure investors.

The index of top European bank shares fell 3.8%, with Deutsche Bank slumping 8.5% alongside a sharp jump in the cost of insuring its bonds against the risk of default.

On Wall Street, big banks fared less poorly, with JPMorgan Chase & Co, Citigroup and Wells Fargo & Co down around 2% each.

The S&P 500 regional banks index recovered 0.9%, trimming its loss in March to 38%. First Republic Bank was near unchanged, while PacWest Bancorp climbed almost 4%.

Some of the top analysts that cover the banking industry stressed on Friday the differences between Credit Suisse, the Swiss bank that needed a rescue, and Deutsche Bank.

JPMorgan wrote in a research note, "We are not concerned" and said Deutsche's fundamentals were "solid".

Paul van der Westhuizen, senior strategist at Rabobank, cited Deutsche's profitability as the "fundamental difference" between the two European banks, given Credit Suisse did not have a profitable outlook for 2023.

"It's a very profitable bank. There's no reason to worry," German Chancellor Olaf Scholz also said. Deutsche Bank declined to comment.

Shares in Germany's largest bank have lost a fifth of their value so far this month and the cost of its five-year credit default swaps (CDS) - a form of insurance for bondholders - jumped to a four-year high on Friday, based on data from S&P Market Intelligence.

The investor pain was spread across the banking sector, with the index of top European banks falling 4.6% and British banks losing 4%, down for a third session in a row.

Irish banking stocks were also nursing losses today, with Permanent TSB sliding 1.2%, while AIB lost 4.8% and Bank of Ireland sank 5%.

Short sellers

Short sellers have made a profit of over $100 million on paper betting against Deutsche Bank stock over the last two weeks, financial data company Ortex said on Friday.

European banks' Additional Tier 1 (AT1) debt - a $275 billion market that was thrust into the investor spotlight during the rescue of Credit Suisse - also came under further selling pressure.

These bonds can be written off during rescues to prevent the costs of bailouts falling onto taxpayers.

"The developments in the AT1 market mean that most European banks are incentivized at this point to issue common equity, which is diluting for shareholders and also the reason why banking stocks are being reset lower," said Peter Garnry, head of equity strategy at Saxo Bank.

In a bid to show it has ample capital while keeping funding costs in check, Italy's UniCredit is leaning towards repaying a perpetual bond at the earliest opportunity in June, a source close to the matter told Reuters. A spokesperson for UniCredit declined to comment.

Investors were looking to see how far U.S. authorities would go to shore up the banking sector, particularly fragile regional lenders, after the collapses of Silicon Valley Bank (SVB) and Signature Bank earlier this month.

U.S. Treasury Secretary Janet Yellen, who on Thursday again sought to calm fears by saying she was prepared to repeat actions to safeguard uninsured bank deposits, chairs a closed meeting of the Financial Stability Oversight Council on Friday.

Amid the market volatility, European policymakers voiced support for their continent's banks, with Germany's Scholz, French President Emmanuel Macron and European Central Bank chief Christine Lagarde all saying the system was stable.

UBS Challenges

Policymakers have stressed the turmoil is different from the global financial crisis 15 years ago, saying banks are better capitalised and funds more easily available.

But the worries spread quickly, and on Sunday UBS was rushed into taking over Credit Suisse after its Swiss rival lost the confidence of investors.

Swiss authorities and UBS are racing to close the takeover within as little as a month, according to two sources with knowledge of the plans.

Separate sources told Reuters that UBS has promised retention packages to Credit Suisse wealth management staff in Asia to stem a talent exodus.

Brokerage group Jefferies said the deal would change an equity story for UBS which was based on a lower risk profile, organic growth and high capital returns.

"All these elements, which is what UBS shareholders bought into, are gone, likely for years," it said.

UBS shares were down 5% on Friday and its five-year CDS shot up 14 basis points.

AT1 bonds

The way Credit Suisse was rescued has also ignited broader worries about investors' exposure to the banking sector. The decision to prioritise shareholders over AT1 bondholders rattled this sector of the bond market.

As part of the deal with UBS, the Swiss regulator determined that Credit Suisse's AT1 bonds with a notional value of $17 billion would be wiped out, stunning global credit markets.

Although authorities in Europe and Asia have said this week they would continue to impose losses on shareholders before bondholders, unease has lingered.

Deutsche Bank and UBS AT1s were down around 6 and 2.5 cents in price, respectively, on Friday, according to Tradeweb data.