Shares of Deutsche Bank are down 9% after a sudden spike in default insurance costs

Shares of Deutsche Bank fell more than 9% in early trading on Friday after a spike in credit default swaps on Thursday evening as concerns about the stability of European banks persisted.

Shares of the German lender retreated for a third straight day and 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 default — rose to 173 basis points Thursday night from 142 basis points the previous day.

UBS’ bailout of Credit Suisse, in the wake of the collapse of US-based Silicon Valley Bank, has sparked contagion concerns among investors, exacerbated on Wednesday by further monetary policy tightening by the US Federal Reserve.

Deutsche Bank’s additional tier 1 bonds (AT1) – an asset class that made headlines this week following the controversial write-down of Credit Suisse’s AT1s as part of the bailout – also sold strongly.

Deutsche led broad declines for 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 action in recent weeks to mitigate the risk of contagion from individual lenders’ problems, and Moody’s said in a note Wednesday that they “should be broadly successful in doing so”.

However, in an uncertain economic environment and with fragile investor confidence, there is a risk that policymakers will not be able to contain the current turmoil without long-lasting and potentially serious repercussions inside and outside the banking sector. team said.

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

Moody’s suggested that, as central banks continue their efforts to reel in inflation, the longer financial conditions remain tight, the greater the risk of “tensions spreading beyond the banking sector, causing greater financial and economic damage.”