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 bank and sovereign swaps were wider week over. In contrast, German bank and sovereign swaps tightened
Expect markets to shake this week on the big news this morning of short selling bans across all equities in Spain and Italy. For Spain, the ban has a 3M target, whereas 1W for Italy.
As we've seen with previous short selling bans, we do not expect the measure to put a floor in equity prices, nor provide any confidence in the banking sectors of the respective countries. We expect sovereign yields to rise alongside the duration of bans.
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
(o)
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European Financials CDS Monitor – Spanish and Italian banks widened across the board while German banks mostly tightened. 3 out of 4 French banks widened. Overall, 24 of the 39 European financial reference entities we track saw spreads widen last week.
Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 35 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.
ECB Liquidity Recourse to the Deposit Facility – The sharp drop from two weeks earlier reflects the ECB's deposit rate change to 0.0%. Since that time, the index has been roughly flat. 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.
Security Market Program – For the nineteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 7/20, to take the total program to €211.5 Billion.
