Deutsche Bank shares fell 13% after a sudden rise in the cost of insurance against default

Deutsche Bank shares fell more than 13% on Friday morning after a surge in credit default swaps Thursday night, as concerns persisted about the stability of European banks.

Shares of the German bank fell for the third day in a row and have now lost more than a fifth of their value so far this month. Credit default swaps – a form of insurance for a company’s bondholders against default – jumped to 173 basis points Thursday night from 142 basis points the day before.

The emergency bailout of Credit Suisse by UBS, in the wake of the collapse of the US-based Silicon Valley bank, has sparked contagion fears among investors, which were deepened by further monetary policy tightening from the US Federal Reserve on Wednesday.

Swiss and global regulators and central banks had hoped that the brokerage’s sale of Credit Suisse to its local rival would help calm markets, but investors are clearly still not convinced the deal will be enough to contain pressure in the banking sector.

Deutsche Bank Additional Tier 1 (AT1) bonds – the asset class that made headlines this week after the controversial delisting of Credit Suisse’s AT1 bonds as part of the bailout deal – also sold off sharply.

Deutsche led the broad declines in the shares of major European banks on Friday, as its German competitor Commerzbank lost 9%, while Credit Suisse, Societe Generale and UBS all fell by more than 7%. Barclays and BNP Paribas each fell more than 6%.

Deutsche Bank announced 10 consecutive quarters of profits, after completing a multi-billion-euro restructuring that began in 2019, with the aim of reducing costs and improving profitability. The bank recorded an annual net income of 5 billion euros ($5.4 billion) in 2022, an increase of 159% over the previous year.

The CET1 ratio – a measure of bank solvency – stood at 13.4% at the end of 2022, while the liquidity coverage ratio stood at 142% and the net stable funding ratio at 119%.

Deutsche Bank declined to comment.

Financial regulators and governments have taken action in recent weeks to contain contagion risk from problems for individual lenders, and Moody’s said in a note on Wednesday that they should “broadly succeed” in doing so.

“However, in an uncertain economic environment and with investor confidence still fragile, there is a risk that policymakers will not be able to limit the current turmoil without long-term and potentially severe repercussions within and outside the banking sector,” the rating agency’s credit strategy team said.

“Even before the pressures from banks became apparent, we had expected global credit conditions to continue to weaken in 2023 as a result of very high interest rates and lower growth, including recessions in some countries.”

Moody’s suggested that as central banks continue to grapple with inflation, the longer financial conditions remain tight, the greater the risk that “stresses will spread outside the banking sector, causing greater financial and economic damage.”