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Takeaway: We caution against riding Bernanke and Draghi's coattails. We view fiscal integration and slow growth as risks ahead.

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:

*QE3 has landed, what now? - Banks swaps and sovereign swaps in America, Europe, and Asia all tightened WoW, benefitting from the Fed's QE3 announcement on Thursday. Now what?

We caution that there is risk in simply riding Bernanke and Draghi’s coattails. We stand by the view that European economies have a lengthy runway to get out from under the debt traps that many have created over the last five years. We continue to view the Eurozone experiment as flawed and see headwinds ahead in creating a fiscal union. Finally, rising commodity costs and sticky to rising inflation rates should present further near-term pressures.

Today’s equity markets show that despite all the optimism behind Draghi’s unlimited sovereign bond purchasing program (OMTs) and Bernanke’s to” infinity and beyond” low interest rates over the last two weeks, European equities are selling off as the realities of the challenges and risks ahead for the Eurozone project return to focus.

On OMTs 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. There is no indication that the OMTs has been initiated.


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




European Financials CDS Monitor – French, German, Italian, Spanish, and Greek bank swaps all traded lower last week. Spanish banks were notably improved last week, with some reference entities seeing swaps decline by more than 20%.

European Banking Monitor: QE3 has Landed... Now What? - 33. banks

Euribor-OIS spread – The Euribor-OIS spread tightened by 1 bps to 17 bps. We're not sure how much lower this series can go from here.  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: QE3 has Landed... Now What? - 33. 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: QE3 has Landed... Now What? - 33. facility