European banks are bracing for another weekend of uncertainty as the cost of insuring against their potential default risk continues to rise.
Shares of Deutsche Bank fell over 7% on the New York Stock Exchange on March 24 after a down day on Frankfurt’s markets. The German bank’s five-year credit default swaps (CDS) climbed 19 basis points from the previous day, closing at 222 bps, according to Reuters, citing S&P Global Market Intelligence data.
Credit default swaps allow investors to swap or offset their credit risk with another investor, and are often used by lenders concerned about a borrower’s default to hedge that risks. During periods of uncertainty, market participants generally assign a higher price to protection.
UBS’s five-year CDS also reportedly jumped up 14 bps on March 24 to close to 130 bps, just a few days after the company acquired troubled competitor Credit Suisse for $3.25 billion as part of an “emergency ordinance” to prevent financial market instability in the region. Under the agreement, the Swiss National Bank has committed to providing UBS with over $100 billion in liquidity.
Despite the rescue of Credit Suisse, investor uncertainty about the European banking system remains high. On March 24, shares of Commerzbank declined by as much as 9%, while Société Générale and UBS tumbled over 7% in European trading. Deutsche shares are down over 25% in the past 30 days.
“This shouldn’t be all that surprising given the whipsaw of going from a zero-interest-rate environment to the fastest rate hikes in recent history,” said Danny Oyekan, CEO of digital investment firm Dan Holdings. “So many banks got caught up in a duration trap of sorts, having bought long-dated bonds that have since seen their value eviscerated by the Fed’s rate hikes.”
While the collapse of US-based Silicon Valley Bank on March 10 required regulators in the US and the UK to curb a potential ripple effect across the banking system, a similar failure for Deutsche Bank or other European banks is unlikely to happen, according to Ilya Volkov, CEO of the Swiss fintech platform YouHodler.
