Wednesday, July 24, 2024

Deutsche Bank shares fell 9% after a sudden increase in the cost of insuring its default

  • 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.

A logo is on display above the headquarters of Deutsche Bank AG in the Aurora Business Park in Moscow, Russia.

Andrei Rudakov | Bloomberg | Good pictures

Deutsche Bank shares fell more than 9% in early trade on Friday, following a spike in credit default swaps 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.

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.

Deutsche led major European banking stocks on Friday, with Commerzbank, Credit Suisse, Societe Generale and UBS all falling more than 5%.

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.”

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