European Banking Monitor: Spanish Bank Bailout Expectations Prompted Across-The-Board Tightening

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 bank bailout expectations prompted across-the-board tightening for EU peripheral countries, EU banks and US global and credit-sensitive banks.

* On the other side of the trade, Germany's swaps widened (the only country in the EU to show this) as did swaps of US insurers, as expectations for low rates persisting longer than previously expected rose.

* Spanish bank bailout euphoria also rippled across junk bonds, leveraged loans and munis, with both indices showing improvement week-over-week.

 If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

Matthew Hedrick

Senior Analyst

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European Financials CDS Monitor – French banks, still the canary in the coal mine, showed the biggest WoW improvement in swaps. Across Europe last week, 37 of the 39 reference entities we track showed spreads tighten. The median tightening was 4.7% (16 bps).  

European Banking Monitor: Spanish Bank Bailout Expectations Prompted Across-The-Board Tightening - 11. banks

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 held flat at 40 bps.

European Banking Monitor: Spanish Bank Bailout Expectations Prompted Across-The-Board Tightening - 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 response to the crisis.  The latest overnight reading is €788.22B.

European Banking Monitor: Spanish Bank Bailout Expectations Prompted Across-The-Board Tightening - 11. ECB liq

Security Market Program – For the thirteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 6/8, to take the total program to €212 Billion.

European Banking Monitor: Spanish Bank Bailout Expectations Prompted Across-The-Board Tightening - 11. SPM