Regulators suspect that a single trade on Deutsche Bank AG's credit default swaps (CDS) may have fueled a global selloff on Friday. The trade, worth roughly €5 million ($5.4 million), was placed on swaps tied to the German bank's junior debt. The contracts' illiquidity can cause a single bet to trigger significant market moves. Deutsche Bank declined to comment on the matter.
The suspected impact of the trade was a widespread rout that led to a decline in banking stocks, a surge in government bonds, and soaring CDS prices for lenders. This wiped out approximately €1.6 billion of Deutsche Bank's market cap and more than €30 billion off an index tracking European banking stocks. Investors have been on edge since the collapse of several US banks and the rescue of Credit Suisse Group AG, looking for signs of strain in other lenders.
European banks and regulators have emphasized that they are closely monitoring risks, including rising interest rates, and maintaining the industry's stability. In response to the unwanted attention, Deutsche Bank published a presentation on Monday highlighting its well-diversified deposit portfolio, a crucial factor for investors following Silicon Valley Bank's collapse. Deutsche Bank and the broader index recovered on Monday, partially reversing Friday's losses.
The European Central Bank's top oversight official, Andrea Enria, called attention to the general lack of transparency in the asset class, urging global financial regulators to scrutinize the CDS market more closely. Enria noted that single-name CDS markets are "very opaque, very shallow, very illiquid," allowing just a few million euros to impact a major bank's CDS spreads, stock prices, and potentially deposit outflows.
