11 months ago • 2 mins
Deutsche Bank’s stock took a beating on Friday, as the cost of insuring against the bank's failure hit new heights.
What does this mean?
Credit Suisse and Deutsche Bank have both weathered their fair share of financial storms. But after surviving the European banking crisis a decade ago, Credit Suisse has vanished from the scene and left its former companion in the spotlight. Maybe it's only natural, then, that worried investors are shifting their focus to Deutsche Bank now, especially given that the price of its credit default swaps – basically what investors buy to protect themselves against the bank’s failure – have spiked in recent days.
Why should I care?
For markets: “Nein” to a stitch in time.
This might have European investors on edge: see, while the Federal Reserve and the Swiss central bank tamed their own brewing storms very quickly, the European Central Bank (ECB) isn't famous for being quick on its feet. What’s more, the ECB's head honcho recently brushed off concerns about big banks in the region, saying that there’s nothing to worry about. Let’s hope that’s right – because if there’s one thing we know from past crises, it’s that a speedy response is vital.
The bigger picture: Banking’s built different.
Authorities can keep insisting the banking system’s safe until they’re blue in the face, but when a confidence crisis sets in, it's hard to shake. See, banking’s a unique industry: you won’t pass up on a Coke or drive past a McDonald’s because those firms’ stock prices are down – but when a bank’s shares take a dive, folk start worrying. That can lead to customers pulling their deposits, as well as prompting other banks to freeze lending – and with both of those out the window, banks have no banking to do, and they can run aground pretty quickly.
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