European Banking Monitor: ESM Delay = Enhanced Uncertainty

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 bank swaps were a mixed batch last week. German, Spanish, and French banks saw broad tightening last week while Italian and Greek banks widened. Sovereign swaps moved alongside bank swaps this week with most European countries tightening except for Ireland. US Bank swaps were generally uneventful last week. 

Today there was an important announcement from Germany’s Constitutional Court that a ruling on the ESM and Fiscal Pact is set for September 12th. The runway of this lack of clarity on the scope of the ESM, especially the mandate for bank recapitalization lending, is hugely unsettling as market participants continue to want answers to a Eurozone "fix" yesterday. We’re forecasting that risk premium reflecting sovereigns and their banks could swing massively based on headline risk until more clarity is reached.

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 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 Spanish banks tightened a lot while French banks tightened a little. Italian banks were a bit wider while Greek banks widened a lot. Overall, 20 of the 39 European financial reference entities we track saw spreads widened last week.

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. banks

Euribor-OIS spread – The Euribor-OIS spread tightened by 3 bps to 38 bps. 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. 

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. euribor

ECB Liquidity Recourse to the Deposit Facility – This index fell sharply from precipitous heights on the first day that the new 0.00% deposit rate went into effect.  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.  

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. facillity

Security Market Program – For the eighteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 7/13, to take the total program to €211.5 Billion. Could this position of hold change? We think the ECB has to take a larger role to buy Europe’s sovereign peripheral paper. We’ll be looking to this Thursday’s ECB meeting for any information on a change of positioning.

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. SMP