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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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Key Takeaways:

The XLF shed another 2.6% last week, bringing the month-over-month decline to 5.2%. The focus of late is weak earnings and ongoing international risks. Euribor-OIS is showing the first signs of rising in a long time, gaining 3 bps week-over-week. 

European Financial CDS - Swaps mostly widened in Europe last week but only by an average 0.4%, as European markets have been propped up recently by hopes of ECB asset purchases. Greece and Russia were the exceptions, as usual, as concerns around the election and solvency, respectively, continued to weigh on their banking sectors.

European Banking Monitor: Euribor-OIS Inflection   - chart1 financials CDS

Sovereign CDS – Sovereign swaps mostly tightened last week on rising investor expectations for ECB asset purchases. Spanish sovereign swaps tightened by -13.3% (-14 bps to 89) while Italian sovereign swaps tightened by -10.8% (15 bps to 126).

European Banking Monitor: Euribor-OIS Inflection   - chart2 sovereign CDS

European Banking Monitor: Euribor-OIS Inflection   - chart3 sovereign CDS

European Banking Monitor: Euribor-OIS Inflection   - 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 widened by 3 bps to 14 bps.

European Banking Monitor: Euribor-OIS Inflection   - chart5 Euribor OIS SPread

Matthew Hedrick

Associate

Ben Ryan

Analyst