European Bank Trouble: Deutsche Bank Stock Under Pressure Due To Higher Costs Of Default Insurance

Deutsche Bank AG (NYSE: DB) shares came under pressure following a spike in credit default swaps amid persistent concerns regarding the stability of European banks.

Deutsche Bank's credit default swaps (CDS) - a form of insurance for bondholders - shot up above 200 basis points (bps) - the most since early 2019 - from 142 bps, based on data from S&P Market Intelligence, Reuters reported.

"Deutsche Bank has been in the spotlight for a while now, in a similar way to how Credit Suisse had been," Stuart Cole, a head macroeconomist at Equiti Capital, said. "It has gone through various restructurings and changes of leadership in attempts to get it back on a solid footing, but so far, none of these efforts appear to have really worked."

In the wake of the collapse of U.S.-based Silicon Valley Bank, the emergency rescue of Credit Suisse Group Inc (NYSE: CS) by UBS AG (NYSE: UBS) triggered contagion concern among investors deepened by further monetary policy tightening from the U.S. Federal Reserve.

The US Federal bank hiked interest rates by 25 basis points, representing its 9th consecutive interest rate hike since it started the tightening policy in March 2022. Chairman Jerome Powell signaled that further increases could be necessary.

Also Read: UBS In Talks To Acquire Credit Suisse, BlackRock Denies Takeover Bid.

Deutsche Bank's additional tier one (AT1) bonds came under pressure since Credit Suisse had to write off around $17 billion last week.

Its CET1 ratio — a measure of bank solvency — came in at 13.4% at the end of 2022, while its liquidity coverage ratio was 142% and its net stable funding ratio 119%, according to its Q4 earnings release.

Moody's suggested that, as central banks continue their efforts to reel in inflation, the longer that financial conditions remain tight, the greater the risk that "stresses spread beyond the banking sector, unleashing greater financial and economic damage," CNBC reported.

Price Action: DB shares are down 10.4% at $8.65 during the premarket session on the last check Friday.

Photo via Shutterstock. 

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