Monday, August 8, 2011

Banking Stress Indicators Still All Green

The above shows the TED spread - a much beloved indicator during the 2008 financial crisis.  It represents the spread between the London Interbank Offered rate (how much banks charge to loan each other dollar funds for three months unsecured) and three month treasury bills.  It thus goes up when banks are nervous about lending to each other.

Since the main way that events in Europe could become a truly global crisis is if it triggered a banking crisis, I think it's of interest to keep an eye on this kind of indicator.  Clearly, at this time there is no indication of a generalized problem here at all.

However, for Eurozone banks, it would seem to be more relevant to look at loans in Euros, for which the equivalent interbank offering rate is Euribor.  Ideally we'd like to look at the spread over German government bonds but I couldn't immediately find a way to do that.  However, the basic Euribor data are graphed here, with the view since 1999 on the left and the last year of data on the right.

This is also showing no sign of undue stress.  In short there is no evidence of any kind of generalized credit crisis in markets at the moment.  However, it's worth noting from the TED data at top that such things can change extremely rapidly.

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