Why the big four banks’ share prices are plunging

It’s not often that you see the big four banks feature among the biggest movers on the index, but it happened today.

Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) lost 4%, 4.6%, 4.8% and 5.2% respectively from their share prices today, dragging the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) down 2.9%. Since the start of this year, the rout appears to be getting worse.

Big four banks share prices Feb 2016

Source: Google Finance

If I had to describe the main reason their share prices plunged today – it was panic – pure and simple. European banks’ share prices collapsed, with Deutsche Bank falling 10% to close at a record low after a surprise profit warning. Pricing for credit default swaps – securities used to insure against possible default by a corporate or sovereign issuer – have soared, as investors worry about ultra-low interest rates in Europe and around the world.

Interest rates near or below zero make it difficult for banks to make a profit on the loans they issue, and investors appear to be fleeing global banks. Negative interest rates were introduced late last year in Europe – designed to encourage banks to lend funds could backfire if the banks decide to start charging customers negative interest on their deposits too.

Then there’s the ongoing fallout from plunging oil prices, and the banks’ exposure to oil and gas companies and the energy sector. According to one report, 42 US oil companies have filed for bankruptcy in just over the past year, with more likely to follow.

Then there are the Middle-Eastern, African and Norwegian sovereign wealth funds that are reportedly drastically reducing their holdings in global securities including bank shares, to offset falling oil prices.

US banks followed the lead from falls in Europe, with Goldman Sachs share price sinking 4.6% and Morgan Stanley 6.9%. Like dominoes, when the Australian market opened, the big four banks came under selling pressure which never really wavered.

You can add to that fears of a slowdown in China, concerns the US economy won’t cope with the US Federal Reserve lifting rates and falling liquidity in global financial markets as China sells off its foreign exchange reserves to prop up its currency.

It all leads to lower confidence in the financial system and its participants, hence the reason shares are being heavily sold off, particularly banks – and especially when they are among the largest listed companies on many exchanges.

Foolish takeaway

More selling appears likely, and it could be compounded if a number of our big four are forced to cut their dividends – which isn’t out of the question. There’s a time to buy bank shares, but it’s probably not just yet.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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