European Banking Monitor: Interbank Risk Throws Off Mixed Signals

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:


*Interbank risk throws off mixed signals. Last week the Euribor-OIS spread tightened by 4 bps to 61 bps while the TED spread rose 1.6 bps over the same period to 41 bps. What's interesting here is the emerging divergence between the two series. Euribor-OIS continues to improve at a consistent rate, as it has done since the start of the year. The TED spread, however, has flattened out since mid-February and is essentially just moving sideways now. Last week's round two of LTRO was the short-term catalyst the markets had their sights set on. While interbank risk was among the most significant factors at the start of the year, the amount of renormalization that has occurred in Euribor-OIS (we estimate ~60% complete) leaves far less room for improvement today than there was back just two months ago.

 


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 4 bps to 61 bps.

 

 European Banking Monitor: Interbank Risk Throws Off Mixed Signals - 1. Euribor

 

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.  Friday made a new high of €820.8 Billion.

 

European Banking Monitor: Interbank Risk Throws Off Mixed Signals - 1. ECB overnight

 

European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 38 of the 40 reference entities. The average tightening was 8.2% and the median tightening was 8.8%.

 

European Banking Monitor: Interbank Risk Throws Off Mixed Signals - 1. banken

 

Security Market Program – The ECB's secondary sovereign bond purchasing program did not buy any paper in the week ended 3/2, which equates to three straight weeks of no purchasing and a mere €183 Million in the first two weeks of February, versus €2.2 BILLION in the week ended 1/20 and €3.8 BILLION in the week 1/12, and a total program of €219.5 Billion. Interesting, and despite ECB purchases, last week saw solid bond demand and lower yields across auctions from Italy, Spain, and France. Who is taking down this paper?  Is the ECB just on hold? Is the ECB winding down the SMP?  Is the ECB making up the numbers? How much further can yields fall despite only marginal changes to the sovereign debt and deficit levels across much of the region, weakness in the banking system, and a tight credit environment?   We continue to scratch our heads….

 

European Banking Monitor: Interbank Risk Throws Off Mixed Signals - 1. SMP

 

Matthew Hedrick

Senior Analyst


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