Deutsche Bank stock plunges amid fears of banking contagion
Zachary Halaschak
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Deutsche Bank’s stock struggled on Friday after an increase in pricing for its credit default swaps, adding to anxiety surrounding the global banking system.
Shares of Deutsche Bank dropped by 11% on Friday. It was the third day in a row that the German-based megabank had its value decline, with shares losing more than a fifth of their total value so far this month alone.
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Credit default swaps, known as CDS, allow an investor to swap their credit risk with another investor, creating a form of insurance against default. CDSs typically go up as investors see the entity in question as being riskier.
On Friday, Deutsche Bank announced it will redeem a tier 2 subordinated bond ahead of schedule, which can be seen as a way to give investors confidence about the firm’s balance sheet, although because shares are slumping, investors might still have doubts.
“It is a clear case of the market selling first and asking questions later,” Paul de la Baume, senior market strategist at FlowBank SA, told Bloomberg. “There continues to be enormous concern that the banking crisis could merge into a heavier risk-off event in markets.”
Germany’s DAX, which is a basket of 40 German blue-chip companies, was down by 1.75% on Friday following the turmoil and uncertainty in the banking sector.
Friday marks two weeks from the day that United States-based Silicon Valley Bank collapsed. SVB’s sudden failure has triggered a series of related problems in not only the U.S. banking system but also the world.
Switzerland-based megabank Credit Suisse began tanking earlier this month after the chairman of Saudi National Bank, the bank’s biggest shareholder, announced it would not be increasing its stake, given regulatory constraints.
UBS then agreed to buy out fellow Swiss competitor Credit Suisse, with support from Swiss authorities, amid the latter’s turmoil following SVB’s collapse. Under the terms of the proposed purchase, UBS agreed to purchase Credit Suisse for just over $3 billion, just a fraction of the firm’s estimated value.
On Friday, the Dow Jones Industrial Average dropped more than 200 points on the worries in Europe.
The Federal Reserve on Thursday released an update on emergency borrowing. It showed borrowing from the Bank Term Funding Program that was created at the outset of the crisis has quickly ballooned to $53.7 billion, up from $34.6 billion the week before.
Borrowing is also high from the Fed’s discount window, which is its permanent program for lending to banks that might be having liquidity problems. While discount window borrowing shrunk from last week and is now at about $110 billion, that figure is still right around the highest level it was at during the 2008 financial crisis
Lawmakers have raised the notion of increasing the cap on the Federal Deposit Insurance Corporation’s $250,000 cap or even having the federal government temporarily insure all deposits in order to return stability to the banking system.
During a congressional hearing this week, Treasury Secretary Janet Yellen said that the government is prepared to take further steps to protect deposits if needed.
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“As I have said, we have used important tools to act quickly to prevent contagion,” she said Thursday. “And they are tools we could use again. The strong actions we have taken ensure that Americans’ deposits are safe. Certainly, we would be prepared to take additional actions if warranted.”
Yellen convened a closed-press meeting of the Financial Stability Oversight Council on Friday morning to discuss the ongoing fracas in the banking sector.