The title of Deutsche Bank, the first German bank, fell this Friday by more than 10% following the sharp increase in the cost of insurance once morest the risk of default (or CDS for credit default swaps). The rout of the action of the giant from across the Rhine fueled concerns regarding the resilience of European banks.
Around 11:20 a.m., the action lost 11.0% to 8.30 euros, following having fallen up to 14%, chaining a third session of decline in a row on the Frankfurt Stock Exchange. Its rival Commerzbank (-8.50%) and in Paris Société Générale (-7.01%) are among the strongest declines affecting the entire sector.
The cost of debt default insurance rose yesterday for most European banks but less so than Deutsche Bank. The surge in the prices of hedging instruments for the bank, the CDS, is a sign of a lack of confidence.
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The banking sector in Europe and the United States has just experienced two weeks of severe turbulence marked by the bankruptcy of the Californian Silicon Valley Bank (SVB), then of two other American regional banks as well as the rescue of Credit Suisse via its forced takeover by UBS.
Bond des CDS
Financial hedging instruments now indicate a probability of default for Deutsche Bank of 27.4% in the next five years, and 19.3% for Commerzbank. For Barclays and Société Générale the probability is lower according to these tools, being around 13%.
Some of Deutsche Bank’s so-called AT1 bonds, equity-like debt instruments, were also sold, pushing up their yield. Bank-issued AT1s have generally been under pressure since Credit Suisse was forced to write down $17 billion worth of such securities as part of UBS’s forced buyout last weekend.
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“Judging by the moves in CDS, AT1s and Deutsche Bank’s share price, investors are worried regarding the health of the bank,” Autonomous analyst Stuart Graham wrote on Friday. The expert nevertheless specifies that he has “no concern as to the viability” of the first German bank, which has in particular a solid cushion of liquidity.
“To be clear, Deutsche Bank is not the next Credit Suisse,” he concludes. Despite the severe turbulence underway, depositors’ confidence “is strong” in European banks, which are deemed to be solid, said Tuesday Andrea Enria, president of the single supervisor of large banks within the European Central Bank (ECB).
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