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:
*European sovereign swaps tightened last week, with Spanish swaps tightening the most (-6.9%) and Irish swaps tightening the least (-2.85%). While Spanish sovereign swaps saw tightening, most Spanish bank swaps continued to widen out.
* We caution against using the Euribor-OIS spread as a measure of interbank lending within the Eurozone. We looked at the relationship between the Euribor-OIS spread and French Bank CDS. It is evident from the results that the relationship between these two data series has been falling apart since mid-march. We now think the Euribor-OIS spread is a potentially dangerous and misleading risk indicator, which is understating the underlying risks. For reference, the Euribor-OIS was roughly flat over last week, while the TED spread continued to fall.
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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 one basis point to 39 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. The latest overnight reading is €793.96B.
European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 24 of the 39 reference entities. The median tightening was 2.6%. Spanish banks continued to see their default probabilities rise notably week over week.
Security Market Program – For a seventh straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 4/27, to take the total program to €214 Billion. The Q&A in Thursday’s ECB conference call may provide some detail if this positioning will change. For now, the ECB appears to be at a “wait-and-see” mode, measuring the impact of the two 36-month LTRO programs before it commits more assets to the European project.
Matthew Hedrick
Senior Analyst
