According to the chairman of the ECB’s supervisory body, credit risk derivatives can “contaminate” banks’ share prices.
European chairman of the supervisory body of the central bank (EKP). Andrea Enria is concerned about the recent wild moves in European bank stocks.
According to him, the large fluctuations in stock prices show that investors can be spooked by movements in the relatively small credit risk derivatives market.
According to the Reuters news agency, Enria commented on the subject on Tuesday at a conference in Frankfurt.
Germany’s Deutsche Bank stock plunged on Friday last week after the price of the bank’s credit risk derivative jumped to its most expensive in more than four years.
With credit risk derivatives, or cds, investors can protect the bonds they own against the insolvency of their issuer.
Deutsche Bank’s price drop on Friday also weighed on the shares of other European banks and caused concern about the state of the European banking sector as a whole.
Enria said the credit default derivatives market is relatively small and illiquid, but a wave of credit default derivatives sales could have broader implications for the much larger stock market.
According to Enria, the trading of credit risk derivatives is “very opaque and very thin”.
He said that an investment of only a few million euros can cause movements in the prices of credit risk derivatives of banks with thousands of billions of euros in balance sheets, “contaminate” stock prices and cause the threat of deposit flight.
Enria proposed that the clearing of credit risk derivative transactions should take place centrally.
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