Next Domino? – Deutsche Bank’s Worries
Another day, another bank? That’s certainly how it feels when looking at the stock market as it seems as if another bank is about to go under. So far, we’ve had Silicon Valley Bank and Silvergate collapse to become the second and third largest banks in US history to be defunct respectively, and First Republic Bank almost following them although there is a rescue effort underway. These 3 banks have one thing in common, and it’s that they are regional banks in the United States, meaning that there wasn’t as large of a threat in the global banking system. Then, as we discussed last week, Credit Suisse had to be bailed out, which was quite scary as they are a systemically important bank in the globe.
These worries spilled onto other European banks, the main one being Deutsche Bank which is based in Germany. Shares fell by as much as 14 percent in the Frankfurt Stock Exchange on Friday as fears from the Credit Suisse acquisition in the neighboring country of Switzerland spilled over the border. Costs to insure bondholders against the bank defaulting rose sharply, which is also what occurred with Credit Suisse before their bailout by the Swiss government and UBS. This instrument is also known as a credit-default swap, a tool you might be familiar with from The Big Short as Michael Burry used these to bet against the banks before the housing crisis. As shown by The Big Short, a rise in these credit default swaps is not a good thing for the bank, making it a perfect display for the fear.
However, many say that there shouldn’t be much to fear about Deutsche Bank, which is another one of the 30 systemically important banks. The bank has reported 10 straight quarters of profit as things have been going well for them, unlike Credit Suisse which had to deal with crises like Archegos. Some analysts have pinned the losses to high emotions during this banking crisis, and time will tell if this was simply a scare.
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
