European Banking Monitor: Draghi’s Market Tilt

Takeaway: SMP on hold for another week and markets await Draghi's next move. We expect no rate cut on Thursday from the ECB.

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 mixed last week, with most markets showing only small changes on the margin. Meanwhile, equity prices for European financials were mostly higher. 

 

*Markets are waiting and watching for Draghi’s next move. Comments from him over the weekend reiterating that bond buying is within the ECB’s mandate and that purchases of shorter term paper do not constitute monetary financing or a breach of EU rules have sent the shorter end of the interest rate curve lower across Europe, and in particular for the peripheral countries.

 

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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

 

(o)

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Security Market Program – For the 24th straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 8/31, to take the total program to €209 Billion.

 

Following President Draghi’s conference call remarks on 8/2 in which he addressed rising yields in the periphery and said that the ECB “may undertake” non-standard  measures, the market continues to be disappointed – there has been no buying.

 

We think it’s unlikely that we’ll get definitive color on secondary peripheral buying at the ECB’s meeting and expect rates to be on hold until we get at least another month of data and after there’s clarity from the German Constitutional Court’s decision on the constitutionality of the ESM and Fiscal Compact. By a narrow margin, consensus expects a 25bp cut to the main interest rate, versus no change at all.

 

European Banking Monitor: Draghi’s Market Tilt - ff. smp

 

European Financials CDS Monitor – European bank swaps were mixed last week, with most markets showing only small changes on the margin. Meanwhile, equity prices for European financials were mostly higher.

 

European Banking Monitor: Draghi’s Market Tilt - ff. banks

 

Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 21 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: Draghi’s Market Tilt - ff. 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.  

 

European Banking Monitor: Draghi’s Market Tilt - ff. facility


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