On Tuesday 28 March, at a conference in Frankfurt on banking supervision, the Chair of the Single Supervisory Mechanism (SSM), Andrea Enria, said he was “very concerned” about the “very opaque” functioning of the credit default swap (CDS) markets despite the strengthening of the regulatory framework undertaken after the 2008 financial crisis, and its possible negative impact on capital markets.
There are “very opaque, very shallow and very illiquid” markets, such as single-name CDS instruments, Mr Enria said. He added: “With a few million, you can move the CDS spreads of trillion-euro-asset banks and contaminate stock prices and possibly also deposit outflows”.
He suggested that the Financial Stability Board (FSB) should examine the real functioning of these markets at international level.
On Friday 24 March, Deutsche Bank’s stock market collapse was preceded by a sharp rise in the cost of hedging against the default of Germany’s largest bank (see EUROPE 13149/1).
In the face of rising credit conditions in the markets caused by the ECB’s monetary policy normalisation, Mr Enria also felt it was necessary for supervisors to assess how banks were managing interest rate and liquidity risks, two types of risk that drove the US bank Silicon Valley Bank into bankruptcy.
The SSM will conduct the first ever cyber risk stress tests for the European banking sector in 2024. (Original version in French by Mathieu Bion)