European Banking Monitor: More Euro-Carriage Spokes Snap

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:

 

* Spanish and Italian swaps continue to rule the day with Italian swaps, in particular, climbing higher. French and German CDS widened by 15 and 12 bps, respectively on concerns around the ongoing deterioration in economic conditions across the Continent, and expectations that the bailout will further encumber both countries. French elections are adding further uncertainty to the economic outlook. EURIBOR-OIS continues to drift sideways as the ECB’s overnight deposit facility holds elevated, near all-time highs. 

  

* EU financial companies were mixed last week, but French banks saw their swaps widen noticeably. BNP Paribas (+25 bps to 263 bps), Credit Agricole (+31 bps to 320 bps), Societe Generale (+24 bps to 339 bps) all widened meaningfully. Recall that there was concern around the counterparty exposure to French banks in 2H11 that principally weighed on US banks, so it's interesting to note the current, short-term divergence.

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Security Market Program – For the sixth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 4/20; the total program remains  at €214B.

 

The standstill comes as market risk returns across Europe.  While there are other channels to suck up sovereign bond issuance, including through funding from the two 36-month LTRO programs, the SMP’s lack of buying may send a negative signal to market participants that are already weary of the sovereign and bank risks bubbling in Spain. Add to that uncertainty around the Dutch government as PM Rutte handed over his resignation this AM after failure over the weekend to agree on budget cuts and the unexpected performance of far-right and anti-Eurozone National Front leader Marine Le Pen, who despite a third place finish behind Socialist Francois Hollande (28.5%) and Nicolas Sarkozy (27.1%) in Round 1 of the French Presidential elections, took a record high 18.2% of the vote.

 

European Banking Monitor: More Euro-Carriage Spokes Snap - 11. SMP

 

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 1 bps to 40 bps.

 

European Banking Monitor: More Euro-Carriage Spokes Snap - 11. 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’s response to the crisis.  The latest overnight reading is €775.7B.

 

European Banking Monitor: More Euro-Carriage Spokes Snap - 11. facility

 

European Financials CDS Monitor – Bank swaps were wider in Europe last week for 23 of the 39 reference entities. The average widening was 0.3% and the median widening was 4.2%. French banks, in particular, saw their default probabilities rise notably week over week.

 

European Banking Monitor: More Euro-Carriage Spokes Snap - 11. banks

 

Matthew Hedrick

Senior Analyst


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