Top ECB official claims CDS market ‘contaminates’ bank stocks and deposit flows.

Recently, the banking sector has been hit by instability following the fall in share prices and asset prices of several European banks, such as Deutsche Bank. Andrea Enria, Chair of the European Central Bank supervisory board, has called for a review of the Credit Default Swap (CDS) market, which she said was “very opaque, very shallow and very illiquid.” She claimed that the lack of transparency could threaten a run on deposits and harm banks’ share prices. Enria has urged for more CDS trading to shift towards central counterparty clearing.

The Contamination Effect of the CDS Market

Enria has argued that opaque trading in CDS markets can lead to sharp stock price movements and contaminate deposit outflows. The spotlight has been thrown onto the single-name CDS market – which acts like insurance and pays out if a company defaults – as an indicator of a company’s financial strength.

Increasing Transparency

Enria said that the Financial Stability Board, a global regulatory body, should examine increasing transparency in the CDS market. She believes that if the market shifted closer to central counterparty clearing, it would improve transparency in these types of calls. Enria also believes there should be more transparency in the CDS market by shifting trading to central counterparty clearing.

Related Facts

• Deutsche Bank shares fell as much as 14% on Friday, prompting German Chancellor Olaf Scholz to reject comparisons between the country’s biggest bank and Credit Suisse, which was forced into the arms of its rival UBS in a weekend rescue deal.
• Short interest on Deutsche Bank rose from less than 2% to more than 3%, the highest level since May, over the same period, said S&P Global Market Intelligence.
• According to a regulatory filing, Marshall Wace, one of Europe’s biggest hedge fund firms, held a short position against Deutsche of 0.61% of its shares as of Friday.

Key Takeaway

The instability in the banking sector has brought the CDS market under scrutiny. Increasing transparency in these markets could help to reduce the risk of contamination from the CDS market to banks’ deposit outflows and stock prices.

Conclusion

The CDS market has faced criticism by Enria due to its lack of transparency and impact on banks’ deposit outflows and stock prices. Moving towards central counterparty clearing could solve these issues, providing more transparency in the single-name CDS market.