Credit Default Swap (CDS)

A credit default swap (CDS) is a financial derivative that allows an investor to swap or offset their credit risk with that of another investor. To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse them if the borrower defaults.

Most CDS contracts are maintained via an ongoing premium payment similar to the regular premiums due on an insurance policy. A lender who is worried about a borrower defaulting on a loan often uses a CDS to offset or swap that risk.

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Why Is 'Credit Default Swap' the Term of the Day?

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After the recent failures of Silicon Valley Bank (SVB) and Signature Bank in the U.S., and Credit Suisse in Europe, worries about the stability of banks fueled a surge in demand for credit default swaps (CDS) of Deutsche Bank, Germany's largest lender. The cost of buying a CDS to insure Deutsche Bank jumped to a four-year high last week. Shares of Deutsche Bank (DB) also plunged, and have lost close to 18% of their value so far this year, though they’re up close to 30% over the past six months.

A CDS is a derivative that transfers the risk of default of a borrower from a lender to a third party. European Central Bank (ECB) supervisor Andrea Enria said that the volatility was concerning as it showed that investors were on edge and could be easily influenced by moves in the CDS market.

-Stella

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