Deutsche Bank shares fell 13% after a sudden increase in the cost of insuring against its default

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

Shares in the German lender retreated for a third straight day. They have 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 its default – rose to 173 basis points on Thursday night from 142 basis points the previous day.

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

Swiss and global regulators and central banks had hoped the sale of Credit Suisse to its domestic rival would help calm markets, but investors were not convinced the deal would be enough to limit pressure on the banking sector.

Deutsche Bank’s additional tier one (AT1) bonds – an asset class that hit the headlines this week after Credit Suisse’s controversial write-down of AT1s as part of its rescue deal – also sold off sharply.

German rival Commerzbank fell 9%, while Credit Suisse, Societe Generale and UBS each fell more than 7%. Barclays and BNP Paribas both fell more than 6%.

Deutsche Bank has posted 10 straight quarters of profits after completing a multibillion-euro restructuring that began in 2019 aimed at cutting costs and improving profitability. The lender posted annual net income of 5 billion euros ($5.4 billion) in 2022, up 159% from the previous year.

Its CET1 ratio — a measure of bank solvency — stood at 13.4% at the end of 2022, while its liquidity coverage ratio stood at 142% and its net fixed funding ratio at 119%.

Deutsche Bank declined to comment.

Financial regulators and governments have taken steps in recent weeks to contain the risk of contagion from problems emerging from individual lenders, and Moody’s said in a note on Wednesday that they should be “broadly successful” in doing so.

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

“Even before banking stress emerged, we expected global credit conditions to continue to weaken in 2023, resulting in significantly higher interest rates and lower growth, including recessions in some countries.”

Moody’s suggested that when financial conditions remain tight as central banks continue efforts to control inflation, there is a greater risk that “strains could spread beyond the banking sector and unleash greater financial and economic damage.”