European Banking Monitor: Financials Swaps Continue Widening

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 

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European Financial CDS - Swaps were notably wider across Spanish Banks and Russia's megabank, Sberbank. We are intrigued with Russia as falling oil prices coupled with the effects of ongoing Western sanctions appear to having a significant weakening effect on Russia's economy. The average CDS profile across the EU bank complex is moving in the opposite direction of Euribor-OIS, our preferred gauge of systemic risk for the European banking system. In other words, while the systemic risk measure appears to be declining, the average individual risk measure across European banks is rising. Stay tuned.

European Banking Monitor: Financials Swaps Continue Widening - chart1 euro CDS

Sovereign CDS – Sovereign swaps were mixed with Spain widening the most at +6 bps to 79 bps. On balance, however, the average change for the week was just +1 bp. 

European Banking Monitor: Financials Swaps Continue Widening - chart2 sovereign CDS

European Banking Monitor: Financials Swaps Continue Widening - chart3 sovereign CDS

European Banking Monitor: Financials Swaps Continue Widening - chart4 sovereign CDS

Euribor-OIS Spread – 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. The Euribor-OIS spread tightened by 1 bps to 10 bps.

European Banking Monitor: Financials Swaps Continue Widening - chart5 Euribor OIS Spread

Matthew Hedrick

Associate

Ben Ryan

Analyst