Do banks' overnight borrowing rates lead their CDS Price? evidence from the Eurosystem

Arbeitspapier

We construct a measure of a bank’s relative creditworthiness from Eurosystem’s proprietary overnight loan data: the bank’s “average overnight borrowing rate spread, relative to overnight rate index” (AOR). We investigate the dynamic relationship between the AOR and the credit default swap spread (CDS) of 60 banks in years 2008 - 2013. We find that in daily differences the AOR leads the CDS at least by one day. The lead is concentrated on days of market stress for banks which mainly borrow from “relationship” lender banks. Such borrower banks are typically smaller, have weak ratings, and likely reside in crisis countries. In longer differences, up to several weeks, both the AOR and the CDS have some predictive power over one another. In sum, overnight borrowing rates may provide additional early-warning indications on certain banks’ deteriorating financial health over and above bank CDS spreads.

Object Details

• ISBN: 978-92-899-1622-6
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1809

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Information and Market Efficiency; Event Studies; Insider Trading ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: credit default swaps (CDS) ; early-warning indicators ; Eurosystem ; leadlag relationship ; money markets ; overnight borrowing rates ; TARGET2

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Jokivuolle, Esa ; Tölö, Eero ; Virén, Matti
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/154242
• Last update: 10.03.2025, 11:42 AM CET