Deutsche Bank (DE: DBKGn) (NYSE DB) shares are down 10% premarket for the US this morning on news about the bank's credit default swap rates. This is, of course, a continuation of the worries stemming from the Credit Suisse problems of last weekend. In many ways these worries and concerns are worse for DB than they are than for near any other bank. For there has long been a feeling that there's something wrong at Deutsche. The cost base is out of line with revenues, there seems to be no major plan to restructure successfully and there's a certain paucity of knowledge over whether there are any gremlins inside the organisation.
Well, yes, but of course DB is so large and such a symbol of German economic might that no one is going to allow any serious problems to develop there, right? Except we would have said that about Credit Suisse right up until last weekend too. One of the world's top 30 systemically important banks? Of course there will be a bailout, resolution and significant equity or bond losses are just impossible! Until, of course, they happen.
Deutsche Bank share price from NASDAQ
No, this does not mean that everyone thinks that the regulators are going to take over DB this weekend. It's all much lighter than that. Credit default swaps, CDS, are a measure of the markets' certainty about repayment by a particular borrower. If that price rises then worries about either liquidity or solvency are by near definition rising. The only let out here is if people are using a large and liquid CDS to bet against the sector, not the specific corporate. So, the DB CDS price is blowing out, people are getting more worried about the liquidity or solvency of DB. Unless they're just betting against the sector.
The reason this is having such a big effect upon the DB stock price is simply that people no longer do believe that Deutsche Bank is untouchable. If the regulators will take down Credit Suisse then, if necessary, they'll do that the DB too. No, that doesn't mean that the time has come, it just makes Deutsche Bank equity much more volatile as there no longer is that implicit guarantee that it won't be allowed to go to zero.