European Banking Monitor: Bank Swaps Reflect Fiscal Cliff Resolution

Takeaway: Bank Swaps Reflect Fiscal Cliff Resolution; Extension of Basel liquidity requirements is another tailwind.

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 Financial CDS - With the exception of Greece and one Spanish Bank (Caja de Ahorros del Mediterraneo), European bank swaps were tighter across the board on US fiscal cliff resolution. Italian and Spanish banks were the most improved, while German and French banks were close behind. We’d note that the Basel Committee’s decision to award banks a four-year delay to meet international liquidity requirements may provide a near-term tailwind for the banks and their risk profiles.

* 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 to date.

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Matthew Hedrick

Senior Analyst

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European Financials CDS Monitor – With the exception of Greece and one Spanish Bank (Caja de Ahorros del Mediterraneo), European bank swaps were tighter across the board on US fiscal cliff resolution. Italian and Spanish banks were the most improved, while German and French banks were close behind.

European Banking Monitor: Bank Swaps Reflect Fiscal Cliff Resolution  - 33  banks

Euribor-OIS spread – The Euribor-OIS spread widened by roughly half a basis point to 12.5 bps in the latest week. 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: Bank Swaps Reflect Fiscal Cliff Resolution  - 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: Bank Swaps Reflect Fiscal Cliff Resolution  - 33. facillity