European banks default-risk indicator jumps, AT1 bonds fall

LONDON (Reuters) – The cost of insuring against the likelihood of default by European banks rose sharply on Friday, as concern about the outlook for the sector continued to grip markets, almost a week on from the collapse of Credit Suisse.

Deutsche Bank (ETR:)’s five-year credit default swaps (CDS) jumped 19 basis points (bps) from Thursday’s close to 222 bps, data from S&P Global (NYSE:) Market Intelligence showed.

Five-year CDS on the German bank were trading at their highest levels since early 2019 and on Thursday saw their largest one-day rise on record, according to Refinitiv data.    

UBS’s five-year CDS also shot up 14 bps from Thursday’s close to 130 bps, the data showed.

Banking stocks fell sharply across Europe, with heavyweights Deutsche Bank and UBS hit hard by worries that the worst problems in the sector since the 2008 financial crisis were not yet contained.

“Underlying sentiment is still cautious and in this environment no one wants to go into the weekend risk-on,” said Nordea chief analyst Jan von Gerich.

European banks’ Additional Tier 1 (AT1) debt also came under fresh selling pressure, with Deutsche and UBS AT1s down around four and two cents in price, respectively, according to Tradeweb data.

Bank AT1s have been hurt since the Swiss regulator ordered 16 billion Swiss francs ($17.5 billion) of Credit Suisse’s AT1 debt to be wiped out as part of its rescue takeover by UBS last weekend.

Shareholders, who usually rank below debt investors when a company becomes insolvent, will receive $3.23 billion.

Although European regulators and authorities in Asia have said this week they would continue to impose losses on shareholders before bondholders – unlike the treatment of bondholders at Credit Suisse – unease lingers.

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