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Shares in Deutsche Bank fell sharply on Friday, as fears about vulnerabilities in Germany’s largest lender sent investors to exit.
Deutsche Bank shares were down 14 percent on the German stock market, and have now lost five times their value since the start of March.
The drop in share prices on Friday comes amid a rise in the cost of financial derivatives embedded in banks, known as credit default swaps.
Credit default swap (CDS) is an insurance, which will pay if the company defaults on the loan. The higher the price of that insurance, the more the market thinks the underlying company will default.
The price of Deutsche Bank’s five-year CDS touched 220 basis points on Friday, up from 142 just two days ago, according to S&P Global Intelligence. This is the highest level for Deutsche Bank CDS since 2018.
However, the price that the swap reached in other banks is still short.
Before Credit Suisse was bailed out by UBS, the price of the swap was as high as 1,194, S&P said.
Like Credit Suisse, Deutsche Bank is one of the 30 banks that are considered important financial institutions in the world according to international rules, so they must have a higher level of capital reserves because their failure could lead to significant losses.
Anxiety remains despite the strong numbers
Fears about Deutsche Bank come despite the lender’s financial results showing capital reserves that exceeded regulatory requirements and profits for the 10th straight quarter. By 2022, the bank will generate 5.7 billion euros ($8.45 billion Cdn) in after-tax profits.
But the ongoing crisis in the global banking system is partly driven by emotion, and not necessarily fundamental.
Banks around the world have been gripped by fear after the sudden and unexpected collapse of several US banks.
Although the details differ in each case, the root cause of all these problems is higher interest rates, which are a double-edged sword for lenders because they increase the return on loans, but reduce the value of government bonds. if they are forced to sell to meet the deposit request.
“Two weeks ago, we thought this was an isolated event that started with Silicon Valley Bank and then spread to First Republic and Signature Bank,” said Peter Tuz, president of the Chase Investment Board. “Today kind of confirmed this is a global problem right now, and no one knows where it will end. So people who act with their feet and continue to sell bank shares.”
Shares in other European banks were also lower on Friday, but not as much as Deutsche Bank. Germany’s Commerzbank fell 8.4 percent, France’s Société Generale fell 7.2 percent, Austria’s Raiffaisen fell.
off 7.5 percent and soon-to-merge Credit Suisse and UBS were down 8.6 and eight percent, respectively.
Deutsche Bank and the German Finance Ministry declined to comment.
“We are optimistic that the SVB and Credit Suisse cases are isolated and contained, but in our view, the tail risk is not over yet,” said Frederique Carrier with RBC Wealth Management in London. “Scars heal slowly and concerns about this sector are likely to linger. The banking system is based on trust so we must monitor future developments very closely.”
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