Deutsche Bank credit default swaps spreads spike; banking still not out of the woods

Global regulators need to begin actively tracking their banks’ exposures.

Deutsche Bank, credit default swaps, spreads, banking crisis, market
First Citizens BancShares assumes assets and liabilities of SVB Financial.

By Sean Ryan

The banking system seems to be stabilizing, at least for now, and liquidity problems will before long be supplanted by credit problems.

Deutsche Bank renewed contagion fears, as credit default swaps (CDS) spreads widened sharply and the stock price dropped sharply on Friday, March 24. On one hand, there are some key differences, starting with the fact that Deutsche Bank is decently profitable, in aggregate as well as in each of its key components.

The bank boasts a CET1 ratio of 13.4% and a Liquidity Coverage Ratio of 135%, although any solace to be found there is mitigated by the fact that Credit Suisse failed with a CET1 ratio of 14.15% and a Liquidity Coverage Ratio of 144% (which had risen to over 150% by March 15).

Deutsche also has material exposure to the US commercial real estate market, and that is certainly a market that bears close watching, but if that represented a clear threat to solvency at Deutsche then it would do so even more fully at many US banks, and the market doesn’t seem to be discounting such a thing, at least not yet.

For the time being, the key things to watch (beyond CDS spreads) are whether counterparties begin limiting exposure, and whether global regulators begin actively tracking their banks’ exposures, which were among the few visible indicators of severe distress at Credit Suisse.

Two weeks after the failures of SVB Financial and Signature, First Republic remains in limbo, as yet unable to find a buyer or a path to survival, but seemingly with the support of regulators to continue trying. JP Morgan Chase bankers working to save the bank have reportedly been augmented by teams from Lazard and McKinsey; one hopes the bank didn’t survive a run only to be done in by a crushing burden of professional fees.

A noteworthy contrast with the two failed banks are reports, admittedly anecdotal yet accumulating over the past two weeks, of customers who recognize the severity of the situation yet refuse to move their accounts because they are so happy with the service they receive there. Whatever becomes of First Republic, it will live on as a case study in the decommoditization of a commodity business.

First Citizens BancShares assumes assets and liabilities of SVB Financial. The transaction will double First Citizens’ balance sheet to $220 billion in assets, not long after the CIT acquisition doubled the bank’s balance sheet to its current size.

(Author is VP/Associate Director for the banking and specialty finance sectors at FactSet )

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First published on: 28-03-2023 at 18:03 IST