Stress test relief

Philip Bayley
Despite all the criticism levelled at the start of last week at the European bank stress tests, a fair amount of tension seems to have been removed from financial markets. While the tests themselves may not have been particularly onerous, the process produced a lot more transparency around the sovereign bond holdings of the banks, both on their trading and bank books.

All of the 91 banks involved, with the exception of a few German banks, have now revealed their holdings.

The chart below shows the fall in the iTraxx European Senior Financials Index since it peaked at 204 basis points on June 8. The index is also down some 17 bps from its close the previous Friday.
20100802 CDS spreads chart

20100802 CDS spreads chart



Included in the chart is the iTraxx SovX Western Europe index, which represents the sovereigns that are ultimate guardians of the banks concerned. The two indices are now back to being virtually level, from being 40 bps apart when concerns about the banks peaked.

Movements in ANZ's five-year CDS spreads are included for comparative purposes. While spread movements were similar, the Australian banks were well removed from the European fears.