Positions in Europe: Short EUR/USD (FXE)
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".
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 less than 1 bps to 76 bps.
ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system. An increase in this metric shows that banks are borrowing from the ECB. In other words, the deposit facility measures one element of the ECB response to the crisis. Banks parked €511.4B in the overnight deposit facility, or the second highest level on record.
European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 31 of the 40 reference entities. The median tightening was 1.8%.
Security Market Program – The ECB's secondary sovereign bond purchasing program (SMP) bought a mere €124 MM in the week ended 2/3 versus a slight €63 MM in the previous week ended 1/27 to take the total program to €219.0 Billion.
This marks two weeks of paltry buying (see chart below) by the ECB, a further surprise given the relatively strong bond auctions across peripheral countries over the last two weeks. There’s no data yet to definitively conclude that the banks (along with their LTRO loans) are soaking up this demand in new issuance. Taking a step back, we’re skeptical that banks would revert to holding on their books what mere weeks ago were considered toxic paper that they were attempting to shed, yet someone is buying.