More specifically, Deutsche Bank shares slid more than 10% this morning after the bank’s cost for insuring bonds spiked. The cost of the credit default swaps the bank uses rose 20% in a single day.
The Bad Bank Virus
European stocks fell hard on the Deutsche Bank news, which analysts said indicated “a wider loss of confidence in the banking sector.” As in the United States, Europeans fear that central bankers have hiked rates too aggressively after leaving them too low for too long. Rising rates have also sparked recession fears on both sides of the Atlantic.
U.S. banks traded lower early on March 24. U.S. markets also fell slightly at the open. Customers Bancorp (NYSE:CUBI), which is considering buying part of the failed Silicon Valley Bank, was down by more than 3% this morning.
Banks were supposed to rise in value once money cost money. Instead, they have fallen because the government bonds that they use to back deposits have fallen in value. SVB failed after a run on deposits forced it to sell long-term bonds at a loss.
Banks that serve wealthy clients with deposits over the insurance deposit limit of $250,000 are believed to be most at risk. About 68% of First Republic (NYSE:FRC) deposits are uninsured, which is why FRC stock has lost about 90% of its value in the past one month.
What Happens Next?
The fall in bank stocks will mean less lending and maybe even a global recession. That seems to be what regulators are hoping for as a cure for inflation.
The medicine will taste nasty to investors and jobholders, however.
On the date of publication, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.