European Banking Monitor: Draghi’s Rally

Takeaway: Draghi's "unlimited" asset purchases tip credit markets scales yet long-term Eurozone structural flaws remain.

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:

 

 * Last week saw the largest single week of improvement in credit default swaps ever for EU sovereign credits on the heels of the ECB's Draghi pledging "unlimited" asset purchases via the new Outright Monetary Transactions Program (OMTs). Spanish, Italian, German and French banks as well as sovereign credit default swaps were sharply lower, reflecting optimism that the ECB will avert the crisis.

 

For more on the OMTs see our notes:

Draghi’s Newest Rescue Plan Revealed in September ECB Presserfrom 9/6

Weekly European Monitor: Buying Timefrom 9/7

 

Draghi also announced that with the new buying program the SMP is terminated, effectively meaning that that there will be no more buying but that the existing holdings will be retained until their maturities expire. We will therefore discontinue our reporting of the SMP data and replace it with the OMTs.

 

OMT Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.

 

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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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European Financials CDS Monitor Italian, German, French and British bank default swaps were down approximately 20% across the board last week, on ECB commentary

 

European Banking Monitor: Draghi’s Rally - 11. banks

 

Euribor-OIS spread – The Euribor-OIS spread tightened by 3 bps to 18 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 Rally - 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.  

 

European Banking Monitor: Draghi’s Rally - 11. facility


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