Deutsche Bank’s stock plunged Friday as the market hones in on the German firm as the next major bank at risk in the wake of long-time rival Credit Suisse’s collapse and similar events stateside.
Frankfurt-listed shares of Deutsche Bank dropped 7.5%, now down more than 25% since March 8, when confidence in the international banking system began to crumble.
The collapse in share prices came as investors holding Deutsche Bank-issued debt securities stoked panic, with the rate of Deutsche Bank’s five-year credit default swaps surging to its highest level since 2019 (credit default swaps serve as a proxy for bond holders’ belief in the health of the issuing institutions).
“We are still on edge waiting for another domino to fall, and Deutsche is clearly the next one on everyone’s minds (fairly or unfairly),” IG Group analyst Chris Beauchamp told Reuters.
The spillover effects of the confidence shakeup were felt in European and American markets.
Shares of UBS, the Swiss bank which rescued Credit Suisse on Sunday, fell 5%, while British and French giants HSBC and BNP Paribas slipped 3% and 5%, respectively; the five largest U.S. banks each slid more than 1%, while shares of First Republic, the American bank most often floated as the next institution at serious risk, fell 5%.
Deutsche Bank, which agreed in 2017 to pay a $7.2 billion fine to the U.S. for its “irresponsible lending practices” in 2006 and 2007 that partially caused the Great Recession, managed to navigate through that controversy by dramatically cutting costs, cutting roughly 20% of its global workforce in a single day in 2018 and successfully turning a profit in its last 10 quarters. The unexpected failures of mid-sized American banks Silicon Valley Bank and Signature Bank earlier this month sent shockwaves throughout the global financial system, eventually leading to the last-second rescue of Credit Suisse. Holders of $17 billion in risky Credit Suisse bonds were not a part of the rescue deal and were left empty-handed, contributing to the rise in Deutsche Bank credit default swap rates as investors hope to avoid similarly finding themselves out of luck. Rising interest rates worldwide greatly contributed to the ongoing crisis, as banks took unrealized losses on longer-term bonds declining value and struggled to keep up proper liquidity.
“It is a clear case of the market selling first and asking questions later,” FlowBank analyst Paul de la Baume told Bloomberg.
Smaller U.S. banks lost about $1.1 trillion in deposits over the last year, according to a recent J.P. Morgan analysis, with money moving into larger banks and cash investments. About half of the outflows came in the weeks following Silicon Valley Bank’s collapse, according to J.P. Morgan.
Credit Suisse Bond-Wipeout Threatens $250 Billion Market (Wall Street Journal)