Bank stocks plunge again! The latest focus of this turmoil is Deutsche Bank (DB.US)

Deutsche Bank (DB.US) has become the latest focus of turmoil in Europe's banking sector in the wake of the Credit Suisse (CS.US) crisis, with ongoing concerns about the sector leading to its biggest share price drop in three years and a sharp rise in the cost of default insurance.

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Deutsche Bank, which has recovered in recent years after a series of crises, said Friday it would redeem a subordinated Tier 2 (T2) note early. Such moves are usually designed to give investors confidence in the strength of the company's balance sheet, but the reaction of the stock price suggests that message is not getting through. According to S&P Market Intelligence, Deutsche Bank's CDS (credit default swaps) continued to surge up to 173 basis points this Thursday, compared to 142 basis points on Wednesday, a move that was the biggest one-day gain ever for Deutsche Bank's CDS.

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This is clearly a case of the market selling first and then asking questions," said Paul de la Baume, senior market strategist at FlowBank SA. Given the risks in the banking sector and what happened with Credit Suisse and the regulators last week, traders didn't have the risk appetite to hold positions throughout the weekend."

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Deutsche Bank's European shares plunged 15%, the biggest drop since the early days of the outbreak in March 2020. The stock was the worst performer in the European bank stock index and dragged the index down as much as 5.7%. Crosstown rivals Commerzbank AG, Banco de Sabadell SA and Societe Generale SA also fell sharply. As of press time, Deutsche Bank's U.S. shares also fell more than 10% in pre-market.

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The broad-based decline undermines the authorities' hopes that last weekend's bailout of Credit Suisse will stabilize the entire sector. Amid expectations across the market that the worst of the financial turmoil is behind them, major central banks, from the Federal Reserve to the Bank of England, raised interest rates again this week, putting the focus on inflation.

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This week, regulators and corporate executives alike are trying to reassure traders about the health of the banking sector. Fabrizio Campelli, a member of Deutsche Bank's management board, said Thursday that UBS's government-brokered acquisition of Credit Suisse did not reflect the state of European banks.

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Standard Chartered CEO Bill Winters noted Friday that while there are still issues to be resolved, "the serious phase of the crisis appears to be over.

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The latest move in European stocks comes on the heels of a sharp drop in U.S. banks. On Thursday, U.S. bank shares fell sharply despite U.S. Treasury Secretary Yellen telling members of Congress that regulators would be prepared to take further steps to protect deposits if necessary.