Banking crisis lingers as contagion fears take aim at Deutsche Bank

Shares in Deutsche Bank fell sharply on Friday, as fears about vulnerabilities in Germany's largest lender sent investors for the exits. 

Deutsche Bank shares were off 14 per cent on the German stock exchange, and have now lost a fifth of their value since the start of March.

The drop in the share price on Friday comes amid a steep rise in the cost of financial derivatives pegged to the bank, known as credit default swaps.

Credit default swaps (CDS) are essentially insurance, which pay off if a company defaults on its loans. The higher the price of the insurance, the more likely the market thinks the underlying company is to default.

The price of a five-year Deutsche Bank CDS touched 220 basis points on Friday, up from 142 just two days ago, according to S&P Global Intelligence. That's the highest level for a Deutsche Bank CDS since 2018.

It is still far short, however, of the price that swaps reached at other banks of late.

Prior to Credit Suisse being bailed out by UBS, the price of its swaps went as high as 1,194, S&P says.

Like Credit Suisse, Deutsche Bank is one of 30 banks considered globally significant financial institutions under international rules, so it is required to hold higher levels of capital reserves because its failure could cause widespread losses.

Fears about Deutsche Bank come despite the lender's financial results showing capital reserves well in excess of regulatory requirements and 10 straight quarters of profitability. In 2022, the bank made 5.7 billion euros ($8.45 billion Cdn) in after-tax profit.

But the ongoing crisis underway in the global banking system is being partly driven by emotion, and not always fundamentals. 

Banks around the world have been gripped by fears after the sudden and unexpected collapse of several U.S. banks.

Although the details are different in each case, the underlying cause of all the problems is sharply higher interest rates, which are a double-edged sword for lenders because they increase the returns from their loans, but sharply reduce the value of their government bond holdings if they are forced to sell them to meet deposit requests.

"Two weeks ago we thought this was kind of an isolated event that began with Silicon Valley Bank and then it spread to First Republic and Signature Bank," said Peter Tuz, president of Chase Investment Council. "Today it kind of confirmed this is a global issue right now, and nobody knows where it will end. So people are acting with their feet and continuing to sell bank stocks."

Shares in other European banks were also lower on Friday, but not by as much as Deutsche Bank was. Germany's Commerzbank was down 8.4 per cent, France's Société Generale was down 7.2 per cent, Austria's Raiffaisen was off 7.5 per cent and the soon-to-merge Credit Suisse and UBS were down 8.6 and eight per cent, respectively.