With widespread concern about the banking sector as a whole, shares of Deutsche Bank fell more than 10% on Friday, March 24, after a sudden spike in the cost of insuring against the banking investment company’s credit-default swaps (CDS).
Notably, the bank’s credit default swaps have risen to their highest level since the beginning of 2019, leading to Deutsche Bank’s stock price falling at a fast rate as the banking contagion continues to spread.
To qualm concerns, German Chancellor Olaf Scholz had stated earlier in the week, “Deutsche Bank is very profitable, there is no reason for concern,” but so far, the CDS market seems to disagree. Finance analyst, author, and senior business editor at the German daily newspaper Die Welt, Holger Zschaepitz, noted ‘banking doom is back in Europe’
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“Deutsche Bank’s credit default swaps, which represent insurance of its bondholders against a potential default, spike as banking doom is back in Europe. Markets price 31% default probability for DB sub-bonds and 16% for senior DB paper.”
Deutsche Bank shares slumped with a resurgence of European bank worries with the latest bout of stress coming days after the Credit Suisse rescue. Zschaepitz added:
“Banks are among the big losers in Europe. Since the outbreak of the banking crisis in early March, both Commerzbank and Deutsche Bank have lost more than average w/ -21% and -19.8%.”
Investors are concerned
Indeed, banking stocks continued their precipitous decline, with European heavyweights Deutsche Bank and UBS among the worst losers. Investors are concerned that government regulators and central banks have not yet brought the largest shock to the industry since the 2008 global financial crisis under control.
Broad measures of financial market stress were also flashing warning flags, with the euro plunging against the dollar, bond rates plummeting, and the price of insuring against bank failures soaring. This occurred in spite of attempts by officials all over the globe to assuage investors.
Investors were watching to see how far U.S. authorities would go to shore up the banking industry, especially shaky regional lenders when additional price declines occurred in Europe at the same time, they were watching for clues.
On Thursday, the Secretary of the United States Treasury, Janet Yellen, said that the Treasury Department and bank regulators were willing to offer extensive deposit guarantees, similar to what they did at the collapsed Silicon Valley Bank (SVB) and Signature Bank.
