Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".
Of the charts below, in particular we want to highlight the ECB’s SMP bond purchasing program that bought 3.361 Billion EUR last week in European sovereign issuance! This is notable due to the paltry spend two weeks prior of 635MM EUR, and is supportive of both the strong demand seen in European issuance last week, and the notable decline in peripheral yields late last week. As a reminder, Draghi continues to warn that the SMP is a temporary facility with limited firepower. While the SMP along with the extension of the LTROs should be additive to capital market gains, we don’t see the programs carrying sustained gains over the intermediate term for European capital markets.
Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 2 bps to 94 bps versus last week’s print of 96 bps.
ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding. Last week the facility hit its periodic low, but this level was higher than the previous cycle, indicating growing risk.
European Financials CDS Monitor – Bank swaps were wider in Europe last week for 28 of the 40 reference entities. The average widening was 2.7% and the median widening was 0.3%.
Security Market Program – The ECB's secondary sovereign bond purchasing program bought 3.361 Billion EUR in the week ended 12/16 (versus 635 Million EUR in the previous week) to take the total program to 211.0 Billion EUR.