A fresh bout of banking sector angst was rattling markets on Friday, with Europe again the focus as shares in giant German lender Deutsche Bank
tumbled at one point nearly 15%.
The volatility follows last weekend’s rescue-takeover of Credit Suisse by UBS
and before that the failure of U.S. banks Silicon Valley Bank , Signature and Silvergate.
The sector has been roiled by concerns that recent sharp rises in bond yields — caused by central banks quickly hiking interest rates to tackle high inflation — have led to big mark-to-market losses on banks’ balance sheets.
But how does the current anxiety compare with previous bouts of financial sector stress?
Arguably the best gauge of market nervousness is not equity but credit default swaps, a tool for insuring a company’s debt against default.
When investors fear an entity may have trouble servicing its debt the price of CDS will rise. And given the banking system, because it is built on myriad linkages, is vulnerable to contagion, a surge in one bank’s CDS can impact others if traders fear the worst.
The good news is that while many European bank CDS have risen in recent days, aside from Credit Suisse, they are not dramatically higher than levels seen late last year. And crucially for Wall Street there is little sign that larger U.S. banks have been infected.
Deutsche’s 5-year credit default swaps were below 100 basis points before the start of March, and moved above 200 basis points at one point on Friday, but they had already traded around 175 basis points in the autumn, for example, when concerns about a European energy crisis were rife.
They remain well below the 300 basis points hit during the eurozone debt crisis in 2011.
In comparison the 5-year CDS of French bank Societe Generale
traded around 100 basis points on Friday, signaling little evident contagion.
The fresh buying of CDS reflected traders desire for protection going into the weekend rather than specific news of difficulties for any insitution, according to analysts.
“It is a clear case of the market selling first and asking questions later. Traders do not have the risk appetite to hold positions through the weekend, given the banking risk and what happened last week with Credit Suisse and regulators,” said Paul de la Baume, market strategist at FlowBank, in an email to MarketWatch.
“There continues to be enormous concern that the banking crisis could merge into a heavier risk-off event in markets. However, the negativity seems to be overblown,” he added.
However, the large U.S. banks are not witnessing stress anyway near the levels of their European peers, according to CDS pricing, as the chart above shows.
JPMorgan CDS, which during the great financial crisis approached 400 basis points, are around 120 basis points currently, according to Bloomberg data.
Going into the European market close the shares of Deutsche Bank had pared losses to 10% and its CDS were around 171 basis points after German Chancellor Olaf Scholz sought to calm the market.
“Deutsche Bank has fundamentally modernized and reorganized its business and is a very profitable bank,” Scholz said at a summit in Brussels “There is no reason to be concerned about it.”