Contagion in financial markets is difficult to define.
Relating to Deutsche Bank, I think it is likely that the proximate cause of Deutsche Bank’s issues with its Credit Default Swap spike on March 23 and its stock decline is the controversial decision by Swiss regulators to permit Credit Suisse bondholders to take the loss of 16 billion Swiss francs ($17.2 billion) on their bonds. The explanation that these bonds were designed to be written off if government support was provided to Credit Suisse could be seen as disingenuous in the current environment.
The hard lessons learned in the US through the aftermath of the Lehman failure in 2008 do not seem to have been learned in Europe. As I said in my earlier article “The Ghost of Lehman Brothers Past”, private investment into the U.S. banking sector during the Financial Crisis of 2007-2009 ran to the tens of billions of dollars immediately prior to the decision in mid-2008 not to stand behind Lehman. Immediately after that decision was taken, investment in the banking sector became essentially zero.
Similarly to the decision by Swiss regulators not to stand behind certain bonds, US regulators did not stand behind Lehman. The rationale to remind bank investors to mind the risk in their investments better is also eerily similar and equally ineffective. The result looks to be similar as well. Private investors who might otherwise provide additional capital and/or a market for the bonds of banks with perceived weakness are staying away. Existing bondholders meanwhile are heading for the exits.
The reason these rationales do not work in the banking sector is the expectation of implied government support to the sector which is not irrationally held by investors making investment, pricing, and trading decisions. Picking particular banks and/or particular cohorts of securities to which this implied support does not apply in the middle of a potential crisis and without any change to the implied policy creates a game of musical chairs investors are not interested in.
The decision related to the Credit Suisse AT1 bonds should be reexamined.