In recent weeks, against the background of the growing fear for the stability of banks around the world, investors and traders began to pay attention to a relatively small market, which may signal ahead of time a possible risk of bankruptcy. This is the “credit swap contracts (CDS)” market. This is a kind of “insurance” that can be purchased against the possibility of the traded company not repaying its debt, which indicates the level of risk that market forces assign to the possibility that it will go bankrupt.
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When the run on the Swiss bank “Credit Suisse” began, for example, about two weeks ago, and the estimates were that it was going to collapse soon or face a government bailout (in the end the bank was sold at a huge discount to UBS), the value of the bank’s one-year CDS soared for close to 1,000 euros. This means that in order to secure ten million euros in the bank’s bonds for five years, one had to pay close to one million euros.
This market returned to the headlines for a moment last Friday, when the economic news agencies began to express concern about the financial situation of one of the largest banks in Germany – “Deutsche Bank”. The background for the concern was a jump in the value of the bank’s CDS to the highest level since their launch in 2018 – 185 thousand euros for five years (that is, a payment of 185 thousand euros as “insurance” for the loss of the investment in the bank’s debt over this time period). The bank’s stock plunged more than 14% in Frankfurt trading, and German Chancellor Schulz was forced to go to the media and clarify that the bank’s situation is “solid” and that it is “profitable”.
Now, German authorities are investigating the dynamics that caused the jump in Deutsche Bank’s CDS on Thursday evening, as they focus on one particularly large transaction and who might have “benefited” from the chaos that created the markets and the decline in the value of the bank’s shares. It is a not particularly large transaction, worth approximately five million euros, which suddenly gave an astronomical value to the one-year CDS of the German bank. According to a report in “Bloomberg”, the authorities in Germany began to “find out with key players in the market details about the deal”.
The effects of this transaction, with the help of the reports about it and the panic that prevails in the financial markets anyway, were enormous. The bank lost 1.6 billion euros of its market value. According to “Bloomberg”, it is not clear at the moment who made the deal and what were the interests behind it. The media in Germany hinted in the past day that the authorities are specifically investigating whether any factor could have benefited from the drop in the share value of “Deutsche Bank”, or of the European integrated banking index, which also lost billions of its value following the concern on Friday. Despite the recovery in the value of the bank’s stock since Friday, it has not yet returned to the level at which it traded before the crisis in the markets experienced last week.