European banks are heading into the weekend with fresh worries about their future, as shares of Deutsche Bank plunged more than 7% on the New York Stock Exchange on March 24 after a day of losses in Frankfurt.
Shares of Deutsche Bank have been hurt by the increased cost of insuring against potential default risks. The German lender's five-year credit default swap (CDS) rose 19 basis points (bps) from the previous day to close at 222 bps, according to Reuters, citing data from S&P Global Market Intelligence. On March 23, the bank's CDS rose to 173 basis points from 142 basis points the day before.
According to Investopedia, credit default swaps allow an investor to exchange or offset their credit risk with another investor. Lenders who are concerned about a borrower's default often use CDS to hedge that risk. In times of uncertainty, market participants often assign higher prices for protection. Concerns about European banks are not limited to Deutsche Bank. UBS' five-year CDS were reported to have risen 14 basis points to nearly 130 basis points on March 24, days after the firm bought struggling rival Credit Suisse for $3.25 billion as a measure to prevent financial losses in the region. Part of an "emergency decree" for market instability. Under the agreement, the Swiss National Bank pledged to provide UBS with more than $100 billion in liquidity.
The Credit Suisse bailout did not remove widespread investor uncertainty about the European banking system. Shares in Commerzbank fell as much as 9% on March 24, while Societe Generale and UBS fell more than 7% in European trade. Shares of Deutsche Bank have fallen more than 25% in the past 30 days. Danny Oyekan, CEO of digital investment firm Dan Holdings, told Cointelegraph in a written statement: “The Deutsche Bank [situation] shows that we are only just getting started and that the crisis within the global banking system appears to be widening. "Given the washout from a zero interest rate environment to the fastest rate hike in recent history, it's not surprising. So many banks got into some kind of duration trap, buying long-dated bonds whose value was later changed by Devaluation due to Fed rate hikes.”
One of the banks reeling from this environment was U.S.-based Silicon Valley Bank, which collapsed on March 10, asking regulators in the U.S. and U.K. to rein in potential knock-on effects across the banking system. However, a similar failure by Deutsche Bank or other European banks is unlikely, according to Ilya Volkov, CEO of Swiss fintech platform YouHodler. In comments to Cointelegraph, Volkov said: “SVB is not subject to the Liquidity Coverage Ratio (LCR) like European banks. The LCR requires the bank to hold sufficient high-quality liquid assets (HQLA) on hand. This allows them to be sold in times of stress To the fund bank." As banking industry grapples with uncertainty, bitcoin.
At the time of writing, it continues to trade near $28,000, up around 17% over the past 30 days. “Bitcoin has performed well in this environment, proving its value as a decentralized and secure store of value with a limited supply,” Oyekan said.
