The aftermath of the U.S. banking crisis, including the bankruptcy of Silicon Valley Bank (SVB), landed in Germany after Switzerland. Deutsche Bank, Germany’s largest bank, has been embroiled in rumors of a crisis. U.S. and European financial authorities are making all-out efforts to prevent the spread of the financial crisis by calling an emergency meeting over the weekend.
On the 24th, the five-year credit default swap (CDS) premium of Deutsche Bank’s bank bonds soared more than 220bp (1bp = 0.01% point). Deutsche Bank’s CDS premium, which was below 100bp until the beginning of this month, hit an all-time high since 2018.
The CDS premium rises when the possibility of bankruptcy of companies that issued bonds or the risk of a credit crunch increases. Deutsche Bank’s stock price fell nearly 15% during the day compared to the previous day. However, it has since recovered slightly and closed at 8.54 euros per share, down 8.53%.
Analysts say that the Deutsche Bank crisis is the aftermath of the Coco Bond (conditional convertible bonds) crisis in neighboring Switzerland. Swiss financial authorities have asked UBS to amortize the $17 billion worth of Coco Bond AT1 issued by Credit Suisse on the condition of merging Credit Suisse. As AT1, which banks have been using to raise capital, has become a piece of tissue, the traditional perception that “bank bonds are safe” has been shaken, leading to a banking crisis.
However, rumors of a Deutsche Bank crisis have not spread much. On this day, the three major U.S. stock market indexes, including the Dow, the S&P 500, and the Nasdaq, closed 0.3% to 0.5% higher than the previous day, respectively. This is because there is an analysis that Deutsche Bank has no major financial problems.
It was largely due to the U.S. and European officials’ quick efforts to block anxiety. German Chancellor Olaf Scholz dismissed rumors of a crisis shortly after the European summit, saying, “Deutsche Bank is fundamentally different from Credit Suisse.” Christine Lagarde, president of the European Central Bank (ECB), also launched a support fire, saying, “We are fully ready to supply liquidity if necessary.” “The U.S. banking system remains sound and resilient,” the U.S. Treasury Department said in a statement after calling an emergency meeting of the Financial Stability Supervisory Commission.