A worker walks past the Deutsche Bank offices in London, on March 16.TOBY MELVILLE/Reuters
Recent volatility in Deutsche Bank DB-N shares was concerning as it showed investors were on edge and could be spooked by moves in the small market for credit default swaps (CDS), European Central Bank supervisor Andrea Enria said on Tuesday.
The German bank’s shares tumbled last Friday as the cost of insuring its debt against the risk of default jumped to a more than four-year high, intensifying worries about the health of Europe’s financial sector.
Enria said the CDS market is relatively small and illiquid, but that a selloff there could have broader ramifications for the much larger share market. He called for CDS, a form of insurance for bondholders, to be centrally cleared.
“What concerned me really was the amount of nervousness, disquiet that I perceived in the market and among investors,” Enria told a conference in Frankfurt.
“There are markets like the single-name CDS market which are very opaque, very shallow and very illiquid, and with a few million (euros) the fear spreads to the trillion-euro-assets banks and contaminates stock prices and also deposit outflows.”
Prices for Deutsche Bank’s credit default swaps, have eased since Friday but remain far above levels preceding the collapse of Silicon Valley Bank and the sale of Credit Suisse, the catalysts for the recent turmoil across the banking sector.
Enria argued that central clearing for credit default swaps would improve transparency, reducing the risk of volatility.
“Having these type of markets centrally cleared rather than having OTC, opaque transactions … would already be a big progress,” he said.