Could Deutsche Bank be the Next Big Collapse?
Shares of Deutsche Bank have taken a nosedive amid growing concern about its financial health in the wake of the collapse of three US banks and the emergency takeover rescue of Credit Suisse by UBS. The German banking giant’s shares have lost over a fifth of their value this month.
Deutsche Bank Sees a Spike in Credit Default Swaps
Deutsche Bank has seen a spike in its credit default swaps, a type of credit derivative that protects the buyer against default and other risks, which suggests more investors are now concerned about the German lender’s ability to stay afloat.
On Thursday, Deutsche Bank’s credit default swaps surged to above 200 basis points (bps), the most since early 2019. In comparison, the bank’s CDS stood at 142 bps just two days ago, according to data from S&P Market Intelligence.
“Deutsche Bank has been in the spotlight for a while now, in a similar way to how Credit Suisse had been,” Stuart Cole, the head macroeconomist at Equiti Capital, said in a comment to Reuters. He added:
“It has gone through various restructurings and changes of leadership in attempts to get it back on a solid footing but so far none of these efforts appear to have really worked.”
Furthermore, some of the bank’s bonds also saw a sharp sell-off. Specifically, its additional tier one (AT1) bonds fell nearly 3 cents to 72.868 cents on the dollar, pushing the yield up to 24%, more than double what it was just two weeks ago.
AT1 bonds have come under the spotlight after the controversial write-down of Credit Suisse’s AT1s as part of its rescue deal. “The fallout from the wipeout of AT1 bonds in the CS rescue has raised questions about a key part of bank funding, which makes the problems DB has been facing that much more difficult to overcome,” Cole said.
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Bank Failures Trigger Contagion Concern Among Investors
The collapse of three major US banks in one week, followed by the emergency rescue of Credit Suisse, has triggered contagion concern among investors, despite calls by lawmakers that eurozone banks are safe.
Credit Suisse is set to be acquired by its longtime rival, UBS. Swiss authorities engineered the mega-merger in an emergency bailout deal to contain financial market panic triggered by the collapses of Silicon Valley Bank (SVB) and Signature Bank earlier this month.
“The measures announced at the weekend … have put a halt to the crisis,” Swiss National Bank (SNB) said after orchestrating the emergency takeover. “The SNB is providing large amounts of liquidity assistance in Swiss francs and foreign currencies.”
However, despite assurances by officials that Switzerland’s banking crisis has been halted, concern over the impact of the recent collapses on the EU banking system remains. Specifically, there has been increasing pressure on Deutsche Bank.
On Friday, the German heavyweight led broad declines for major European banking stocks, falling as much as 13%. Furthermore, rival Commerzbank shed 9%, while Credit Suisse, Societe Generale, and UBS fell by more than 7%. Barclays and BNP Paribas both dropped by more than 6%.
In another blow to the EU banking system, a series of interest rate hikes from the Federal Reserve and other European central banks this week added to fears of tightening financial conditions. Last week, European Central Bank president Christine Lagarde said there was “no trade-off” between seeking to control inflation and seeking to foster financial stability.
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