European Banking Monitor: Euro Banks Rally on Draghi’s “Whatever”

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:

* ECB President Mario Draghi's announcement last week that "The ECB is ready to do whatever it takes to preserve the euro" triggered a broad-based rally in European bank equities and swaps. US Global banks followed suit. It's interesting to note, however, that Greek banks continued to widen out, suggesting that Greece leaving may not be part of Draghi's preservation plans.

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Matthew Hedrick

Senior Analyst

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Security Market Program – For the twentieth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 7/27, to take the total program to €211.5 Billion. We believe that in this Thursday’s ECB interest rate meeting, Draghi will be forced to issue some sort of monetary or fiscal policy following his comments that he’ll do “whatever” it takes to support the currency. We think that could likely include a reengagement of the SMP. We see less probability of another LTRO and think that while a 25bp cut to the main interest rate could be likely, it will have very little lasting impact on the markets.  

European Banking Monitor: Euro Banks Rally on Draghi’s “Whatever” - aaa. smp

 

European Financials CDS Monitor Spanish, German, French and Italian banks tightened.  Meanwhile, Greek banks widened. Overall, 28 of the 39 European financial reference entities we track saw spreads tighten last week.

European Banking Monitor: Euro Banks Rally on Draghi’s “Whatever” - aaa. banks

Euribor-OIS spread – The Euribor-OIS spread widened by 1 bps to 36 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: Euro Banks Rally on Draghi’s “Whatever” - aaa. euribor

ECB Liquidity Recourse to the Deposit Facility – The sharp drop from three weeks earlier reflects the ECB's deposit rate change to 0.0%. Since that time, the index has been roughly flat.  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: Euro Banks Rally on Draghi’s “Whatever” - aaa. ecb liquid.