European banks are going into the weekend with renewed fears surrounding their future, as shares of Deutsche Bank plunged over 7% on the New York Stock Exchange on March 24, after a down day on Frankfurt's markets.
Deutsche Bank shares were impacted by an increase in the cost of insuring against its potential default risk. The German bank's five-year credit default swaps, known as CDS, climbed 19 basis points (bps) from the previous day, closing at 222 bps, according to Reuters, which cited S&P Global Market Intelligence data. On March 23, the bank's CDS rose to 173 bps from 142 bps the previous day.
According to Investopedia, a credit default swap allows an investor to swap or offset their credit risk with another investor. Lenders concerned about a borrower's default often use a CDS to hedge that risk. During periods of uncertainty, market participants generally assign a higher price to protection.
Fears about European banks are not limited to Deutsche. UBS's five-year CDS reportedly jumped up 14 bps on March 24 to close to 130 bps, just a few days after the company acquired troubled competitor Credit Suisse for $3.25 billion as part of an “emergency ordinance” to prevent financial market instability in the region. Under the agreement, the Swiss National Bank has committed to providing UBS with over $100 billion in liquidity.
The rescue of Credit Suisse has not stemmed widespread investor uncertainty about the European banking system. On March 24, shares of Commerzbank declined by as much as 9%, while Société Générale and UBS tumbled over 7% in European trading. Deutsche shares are down over 25% in the past 30 days.
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