Stress Measure: European Interbank Lending

One of the simplest ways of gauging the health of a banking system is the terms on which they agree to lend to one another. Though this is not the only (or even the best way) its simplicity makes it popular.

In the case of the Euro-zone (discussed in the prior post) one can simply take the three month EURIBOR fixing rate and subtract the three month OIS (Overnight Index Swap) rate. The wider the spread (or the bigger the difference), the more banks are demanding  compensation for the credit risk they perceive in lending to other banks in Euros.

The following chart illustrates how mistrust amongst banks operating in Europe has been increasing in the past few weeks. Notice, however, that we are nowhere near post-Lehman levels. Bank recapitalizations in the Euro area are aimed, in part, on alleviating this mistrust, so banks are willing to lend.