Saturday, December 30, 2017

Watch for Eonia Year End Spikes

In the last two days of November, the Eonia, which is the one day Euribor rate, spiked 6.1% and 6%, which is very unusual.  Bloomberg gave, as an explanation, that the National Bank of Greece had excess liquidity of 450 million euro which it loaned in the last two days of November to peers in its country, but would that cause two days of 6% spikes?  Was something else going on with eurozone bank liquidity?

The two regional Italian banks Carige and Creval have been struggling for additional funding, along with four other small Italian banks, to meet the ECB balance sheet liquidity rules and lower allowable NPLs (non-performing loans).  But any month end liquidity needs would have been relatively small.  However, new ECB bad loan rules will become effective January 1, 2018 despite significant opposition, particularly from Italy.  This will put additional pressure on Italian banks, because, while eurozone banks as a whole have 5% NPLs, Italian banks have 15% of that 5%.  The final compromise is to enforce the new NPL rules on a bank by bank basis, whatever that means.

Meanwhile, on 18 November Monte dei Praschi di Sienna, had to put $671 million (569.4 million euro) in reserve, before its new reorganization board meets for the first time in December, which


makes one wonder what balance sheet liquidity pressure Monte dei Paschi was under at month end and if that would account for the 6.1% and 6% November month end spikes when combined with the National Bank of Greece excess liquidity loans.

Since the end of November, the ECB has said one eurozone bank is falling short of capital requirements.  The Italian banks Carige and Creval have scrambled to firm funding prior to the new year and the Italian March 4, 2018 national elections,  which willing likely end in a politically destabilizing result.  Meanwhile the Catalonia problem continues for Spain and the legal challenges to the sell of Banco Populare for one euro are instensifying.  While Spain has chosen to not bail out its banks, Italy has done so in 2017 and the special fund they established at the beginning of the year is almost depleted. 

This is not a Minsky moment, but the hidden risks of eurozone banks, particularly in Italy --- but not exclsively, and the growing political instability of Italy, Spain, Germany and the growth of right wing governments threatening democracy in Europe make watching the year end Eonia interesting.

The Eonia rate is prohibited from being seen in real time and public release of the day's rate is delayed 24 hours.  As I write this on the 30th of December, the last Eonia rate is for the 28th.  This means we may not know what happens year end with the Eonia until 2 January 2018 or later.

Given the liquidity and NPL balance sheet rules, there should be a spike.  If the spike is 3% or higher there is something going on with a large bank or several smaller banks.

I would not be unhappy if the Eonia spikes less than 3% or very little, but the low interest rates, liquidity rules, and NPL rules are putting pressure on small eurozone banks and the ECB has been adamant about not bailing out banks and encouraging the merge of banks into even larger, more systemically dangerous, banks with more capitalization.

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