European banks head into the weekend with renewed fears for their future as Deutsche Bank shares submerged more than 7% on the New York Stock Exchange on March 24, after a down day in the Frankfurt markets.
Deutsche Bank shares were hit by an increase in the cost of insuring against its potential risk of default. The German bank’s five-year credit default swaps, known as CDS, rose 19 basis points (bps) from the previous day, closing at 222 bps, according to Reuters, which cited data from S&P Global Market Intelligence. On March 23, the bank’s CDS rose to 173bp from 142bp the day before.
According 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. During periods of uncertainty, market participants generally price protection higher.
Fears about European banks are not limited to Deutsche. UBS’s five-year CDS reportedly rose 14bps on March 24 to around 130bps, just days after the company acquired troubled competitor Credit Suisse for $3.25bn as part of a “refund ordinance.” emergency” to avoid instability in the financial market in the region. . Under the agreement, 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 refused up 9%, while Société Générale and UBS fell more than 7% in European trading. Deutsche shares are below more than 25% in the last 30 days.
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“German bank [situation] indicates that we are only at the beginning of what appears to be an escalating crisis within the Global Banking System,” Danny Oyekan, CEO of digital investment firm Dan Holdings, told Cointelegraph in a written statement. “This should not be so surprising given the whiplash of going from a zero interest rate environment to the fastest rate hikes in recent history. Many banks got caught in something of a duration trap, having bought long-term bonds that have since seen their value eviscerated by Fed rate hikes.”
One of the banks caught in this environment was US-based Silicon Valley Bank, which collapsed on March 10, forcing US and UK regulators to rein in a potential domino effect in the entire banking system. However, a similar failure is unlikely to happen for Deutsche Bank or other European banks, according to Ilya Volkov, chief executive of Swiss fintech platform YouHodler. In a comment to Cointelegraph, Volkov said:
“Silicon Valley Bank was not subject to the Liquidity Coverage Ratio (LCR) as banks in Europe are. The LCR requires banks to keep sufficient high-quality liquid assets (HQLA) on hand. In a stress scenario, these assets can be sell to the banks of funds”.
While the banking industry wrestles with uncertainty, Bitcoin (BTC) continues to trade near $28,000 as of this writing, gaining roughly 17% over the past 30 days. “Bitcoin has performed well in this environment, and this is a testament to its value as a secure, decentralized store of value with limited supply,” Oyekan said.
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