Eurozone Crisis Vital Signs
September 15, 2011 4:08 PM
The largest ripples in short-term bank funding rates since Lehman's 2008 collapse were caused by turmoil surrounding the first Greek bailout early last year. Moves in short-term rates have been dulled by the massive amounts of liquidity central banks have injected into the financial system and by the fact that many of the weakest institutions have been rationed out of money markets. The data here shows rates after the Federal Reserve cut its target for overnight funds to near zero in December 2008.
In an alarming sign, short-term bank funding rates have started to climb again recently.
The spread between three-month Libor and the overnight indexed swap rate shows a similar pattern. The measure is widely used as a barometer of market perceptions of bank health, since no principal is at risk in interest rate swaps. Overnight indexed swaps (OIS) enable counterparties to exchange a fixed yield for the average federal funds rate over a stated term.
Like core short-term rates, Libor OIS began a startling ascent this summer.
Another view on stress among European banks is provided by volumes of outstanding financial commercial paper. Amounts issued by domestic borrowers have fallen since 2008 because deposits have been easy to come by. That has left an increasing share issued by foreign borrowers.
In July, however, volumes of outstanding foreign financial commercial paper fell sharply as money market funds sought to reduce exposure to the instability in Europe.
Growing strains are apparent in the prices of contracts that protect bank-debt investors against default. For three French giants with large exposures to Greece, CDS trading levels have surged well above peaks reached around the time of the first Greek bailout and the financial crisis in late 2008 and early 2009. (The figures here reflect the annual cost to insure 10 million euros of debt against default.)
In the U.S., Bank of America's CDS price has recently risen to a level exceeded only by SocGen among the three large French banks on the previous slide. However, jitters over B of A's stability appear to be linked to its domestic mortgage troubles. CDS prices for the other three American banks remain well below their crisis levels of a few years ago. (The figures here reflect the annual cost to insure $10 million of debt against default.)
