The global banking crisis shows alarming signs of widening. stock Deutsche Bank Collapsing by 13% at noon on Friday, after a sharp jump last night in the pricing of the bank’s risk level in the markets. It seems that the investors’ concern is for the bank’s stability, about a week after Switzerland forced the sale of Credit Suisse to UBS, in a move that sparked a wave of disputes.
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One of the analysts in Israel who closely follows the developments in Europe, points out that “Deutsche Bank is at the center of another liquidation sale in the financial shares”, according to him, the risk level of the German investment and financial services bank Deutsche Bank jumped sharply in the markets. “Credit default swaps (CDS) on Deutsche Bank’s senior debt jumped to the highest level since their launch in 2018 – 190 basis points.”
According to the analyst, “shares of other banks in Europe with high exposure to business credit also recorded declines. Among other things, shares Commerzbank Falling 9%, so are shares Societe Generale the French fall by 7%”.
This is a real fear of “contagion”, this time within the European banking system. The collapse in Deutsche Bank shares also drags the stock markets in Europe, along with the futures contracts on the leading indices of Wall Street, to sharp price drops. The German DEX index, of the Frankfurt Stock Exchange, falls by 2.3% on Friday afternoon, its French counterpart, the CAC index, plunges by 2.6%, while the London FTSE index falls close to 2%. S&P 500 futures are down less than a percent.
The first trigger was the fall of Silicon Valley Bank
So what happens to Deutsche Bank? On Thursday night, the value of the bank’s CDS (swap contracts for credit risks) jumped sharply. These are contracts that can be bought or sold in the markets and they embody a level of risk of the asset for which they are traded (underlying asset). These contracts are available to large companies, including banks, as well as countries. A sharp jump in CDS prices taught investors in Deutsche Bank shares that the level of risk attributed by the market to the bank had jumped, leading to a liquidation sale of its shares.
This is a contagious fear and the fear is of the expansion and “contagion” of the banking sector in Europe. The first trigger was of course the fall of Silicon Valley Bank, earlier this month. His collapse and the American government’s guarantee of his deposits, still created ripples that were felt in the shares of the regional banks in the US. The crisis later expanded to Credit Suisse last week. The Swiss government decided to bail it out in a move that was heavily criticized by the markets. This is because the bailout included a preference for shareholders over creditors who held special bonds (AT1) which the regulator wrote off at a cost of 16 billion Swiss francs, or 17 billion dollars.
AT1 type bonds, acronyms for Additional Tier 1, i.e. an additional first layer, are bonds issued by banks that are considered bonds with a higher degree of risk in the debt accumulated by the bank. They are sometimes also referred to as CoCo bonds, and they provide a higher yield as their role is to preserve the bank’s capital in case of emergencies. Then they may become the bank’s shares or simply be written off. The move by the Swiss regulator angered investors, because it wrote off the bonds these during the bailout of Credit Suisse, but left the value of the bank’s shares in the deal to sell it to UBS. Preference for shares over bonds is a controversial move.
Deutsche Bank also has type AT1 bonds, which investors may be looking at with concern. Although after the deletion by the Swiss, regulatory voices were heard in other countries on the continent that promised not to behave in this way. But it is doubtful whether this is enough to calm the spirits.
Deutsche Bank is a German banking giant that operates as an investment bank and also a financial services company worldwide. Its headquarters are located in the city of Frankfurt in Germany, with its current market value, after the share’s fall in the markets, estimated at 16.5 billion euros. The bank, founded in 1870, operates in nearly 60 countries, with its revenues amounting to 27.2 billion euros in 2022 and the net profit attributable to its shareholders amounting to 5 billion euros. The equity attributed to the shareholders amounted to 62 billion euros at the end of that year.