ECB representative criticizes non-transparent CDS market following the decline of Deutsche Bank's share value
It's currently 6:55pm on Tuesday, March 28, 2023.
An important figure within the European Central Bank (ECB) has criticized the lack of transparency in the credit default swap (CDS) market. This came after the sudden increase in Deutsche Bank's CDS prices which caused the bank's shares to dramatically decrease on Friday.
In response to being asked about the sharp decrease in Duetsche's stock value last week, Andrea Enria, who presides over the ECB supervisory board, declared today that there are certain markets, such as the individual-name CDS market, which aren't very clear, don't have much depth, and have low liquidity.
He explained that the market is vulnerable to the effects of trades, causing a significant impact on the overall market.
Enria expressed his concern regarding the potential impact of a few million on a trillion-euro-asset bank's CDS spread, resulting in the contamination of stock prices and a possible outflow of deposits. This statement was made during a conference in Frankfurt, as reported by media outlets.
A CDS is a type of financial tool that permits an investor to exchange or balance out their credit risk. The value of a CDS increases when a company is viewed as having a lower possibility of repaying its debts.
Enria suggested that additional efforts should be made to address the lack of transparency in the market.
He stated that a significant advancement would be made if these kinds of markets were cleared centrally rather than using obscure over-the-counter transactions.
Enria made remarks following a significant decline in the value of Deutsche Bank's stock, which dropped approximately 15 percent due to the increasing cost of its CDS on Friday.
From Monday to Friday, Deutsche Bank's five-year CDS increased from less than 100 basis points to over 200 basis points. Nonetheless, the bank's stocks have improved slightly this week since the CDS cost has decreased.
According to Bloomberg's report today, it is possible that the complete sale of €5 million of Deutsche Bank's junior debt insurance may have been the reason for the decline in the market on Friday.
According to insiders, as reported by Bloomberg, regulators have engaged in discussions with participants in the market regarding the transactions.
According to Bloomberg, there is no indication of any wrongdoing in the transaction, and the reason for making the trade is not apparent.
