Investors walk with lead feet. The scare with Deutsche Bank raised doubts about credit default insurance on its subordinated debt has shown that the markets have not yet digested after the bankruptcy of SVB Financial and the purchase of Credit Suisse by UBS. Although the stock markets of the Old Continent are already pointing upwards in search of recovering the levels prior to March 10, the overreaction registered last Friday leaves the CDS (credit default swap) of the heavyweights in the sector affected, which are still resisting of the bach.
The cost of credit coverage has been severely affected after the on-demand bailout carried out in Switzerland where AT1 (CoCos) bondholders have been left out. Specifically, the CDS of the large banks of the worst quality debt have experienced a rise of 59% in the last three weeks, compared to 50% of the senior debt, whose rise is also a good indicator that the tension is still present . The rebound is very similar to that recorded by default insurance on the day the shadow of the crisis (March 24) shook the German banking giant last week.
At Deutsche Bank itself, the level of CDS continues to run rampant. In the case of the one-year subordinated debt -the origin of the panic wick of a week ago- it still remains above 600 points after relaxing slightly from the 700 it marked on March 24, but it multiplies by ten the level recorded three Thursdays ago. The same occurs with the five-year tranche (more than 400) and with the specifics of senior debt, in which, although the pressure is relaxed, it remains around 180, some relevant jumps with which it can double. This behavior is repeated among the main European banks, with the focus being on debt with the worst credit quality and more than double the average.
By country, in the Italians Intesa Sanpaolo and Unicredit the CDS of the subsidiary exceeded 300 points, almost tripling the threshold of the best quality, which ranges between 110 and 120, with less volatile rallies in contrast to other peers. The difference is also seen at Société Generale and BNP Paribas. In the first it is below 100, while the other has shot up in the last week in both cases. On the other side of the English Channel, attention is focused on Barclays, one of the three largest along with HSBC and Lloyds. The risk of the senior debt of the firm headed by Nigel Higgins moves at 140, marking less distance with the subordinate than the rest (257).
This follows in the footsteps of ING (165 points in the highest-risk bonds and less than 90 in the latter). On the Spanish banking map, the firms most exposed abroad, such as Santander and BBVA, never exceeded 100, but they are having a hard time getting back to ‘normality’ prior to SVB Financial. At the present time, they navigate around the 70s, while at the beginning of the month they did not reach the 60s barrier. It so happens that the domestic firms ‘made in Spain’ register a higher ratio, above all, Banco Sabadell (139 points) which, precisely, is the one that has suffered the most on the Madrid floor. In fact, its junior bond CDS is skyrocketing and nearing 400.
In Switzerland, the pressure falls on UBS, which has experienced a rise in its CDS and, although this has deflated in the case of the senior (174 points), the subordinate is more than 70 points higher after Credit Suisse has passed you her ‘hot potato’ with your purchase. The support of his rival has helped him reduce fears and falls to an unprecedented level since September 2022, just before announcing the capital increase that established the Saudi National Bank as the main shareholder.
The ECB urges to review these products
Analysts have dug up the dust on this relationship, which is once again gaining prominence, conditioning the activity of the stock markets. The European Central Bank (ECB) itself has openly criticized these instruments, calling them “opaque”. Specifically, it has been the president of the Supervisory Board, Andrea Enria, who has assured that they “contaminate” the price of bank shares and threaten to cause a flight of deposits, a reason that has led him to demand greater transparency.
At a conference in Frankfurt, the president has called for the Financial Stability Board to examine the consequences. The characteristics of these products differ in an indicator of financial strength, being capable of causing an earthquake like the one generated last Friday, when the titles of Deutsche Bank plummeted more than 8.5%. After the storm, the titles have recovered gradually in recent days, but there is still a bit left to overcome this shock.
