European banks head into the weekend with fresh fears about their future as Deutsche Bank shares collapsed more than 7% on the New York Stock Exchange on March 24, after a day of decline in the Frankfurt markets.
Deutsche Bank shares were hit by an increase in the cost of insuring against their potential risk of default. The German bank’s five-year credit default swaps, known as CDS, rose 19 basis points (PB) from the previous day, closing at 222 PB, according to Reuters, which cited data from S&P Global Market Intelligence. On March 23, the bank’s CDS rose to 173 bps from 142 the day before.
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 defaulting often use a CDS to hedge that risk. In periods of uncertainty, market participants often assign a higher price to protection.
Fears about European banks are not limited to Deutsche. According to various reports, UBS’s five-year CDS rose 14 bps on March 24 to close to 130 bps, a few days after the entity to acquire troubled competitor Credit Suisse for USD 3,250 million as part of an “emergency ordinance” to prevent instability in the region’s financial markets. Under the deal, the Swiss National Bank has committed to providing UBS with more than $100 billion in liquidity.
The Credit Suisse bailout has not curbed widespread investor uncertainty about the European banking system. On March 24, Commerzbank shares fell up to 9%, while those of Société Générale and UBS plummeted more than 7% in the European day. Deutsche shares have fallen more than 25% in the last 30 days.
“The Deutsche Bank situation indicates that we are only at the beginning of what appears to be a deepening crisis in the global banking system,” Danny Oyekan, CEO of digital investment firm Dan Holdings, told Cointelegraph in a written statement. “This shouldn’t be all that surprising given the shock of going from a zero interest rate environment to the fastest rate hikes in recent history. So many banks got caught in something of a duration trap, having bought bonds at long-term that have since seen their value eviscerated by Fed rate hikes.
One of the banks caught in this environment was the American Silicon Valley Bankwhich sank on March 10, forcing US and UK regulators to stop a possible domino effect throughout the banking system. However, a similar bankruptcy at Deutsche Bank or other European banks is unlikely, according to Ilya Volkov, CEO of Swiss fintech platform YouHodler. In a comment to Cointelegraph, Volkov said:
“Silicon Valley Bank was not subject to the Liquidity Coverage Ratio (LCR) like banks in Europe. The LCR requires banks to keep enough high quality liquid assets (HQLA) on hand. This is so that in case of a scenario high voltage, these assets can be sold to finance the banks”.
As the banking sector battles uncertainty, Bitcoin (BTC) is still trading near $28,000 at press time, with an approximate gain of 17% over the past 30 days. “Bitcoin has performed well in this environment, demonstrating its value as a secure, decentralized store of value with limited supply,” Oyekan says.
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