Bank CDS prices rocket

Find below a chart of recent CDS price movements for the major banks:


And for a longer term perspective, try this one:

This chart tells us a couple of things. First, the cup and handle formation identified last week has now delivered its promised surge and we have broken through the level set in the first round of the European crtisis in May 2010.

Second, if we take CDS prices as a proxy for bank funding pressures, we can see also on this chart that although the rise is alarming, it will have to be significant and sustained ala 2008 to cause the banks actual distress.

We will track it.

Houses and Holes
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  1. Wow, that’s fascinating. Are those kind of charts freely available on the web somewhere?

    I noticed last night that Suncorp’s share price seems to have been hammered more than the big four. In fact the price is down so far that – except for the spike down in the 2008/9 – the price has not been seen for more than a decade (Google Finance data doesn’t go back far enough).

    I wonder how the mid-tier lenders are looking on their CDS?

    • NAB is no better. Excluding the GFC round 1 dip, it’s share price is now lower than it has been at any time in the 21st century…

  2. In 2008 before the federal government guaranteed the banks debt at minimal cost, the market’s belief of TBTF and impled government guarantees had not taken hold and been priced in. Today it has been priced into the banks cost of funds. Banks balance sheets are much larger with greatly increased exposures to a more inflated housing market.

    As the global deleveraging continues it’s likely to be the availability of investors to provide debt that will be the bigger problem. A scenario where bank and Australia’s cost of funds increase as house prices plummet is a significant risk.

    Lastly, and let me emphasise the point again, going into cash by depositing money with an Australian bank is an investment in residential mortgages which is why deposit rates are so high.

    • I would have thought anything under a million was a variable-rate at-call treasury bond, given the guarantee. Am I missing something?

      • The legislation on the guarantee is quite convoluted. But the upshot is that a deposit is not a government bond with the contractual rights that conveys. The depositor does not necessarily have government support for timely payment. Certainly the ability of the government to not pay or change the terms of interest owed to the depositor is very real and probable if depositors need to call on the guarantee.

        Do not rely on easily changeable legislation, even retrospectively, as an undeniable bond/contractual obligation by the government.

        • Sandgroper Sceptic

          Argentina is one recent example. Many laws were simply ignored or changed and the little people lost their money.

          When the crisis hits the first ones that panic do best.

  3. Weimar Republic

    I’m trying to remember what happened in ~May last year. The CDS chart shoots straight up.

      • Precious Bodily Fluids

        D’oh! (slaps forehead)

        one eye trying to read articles, and the other eye trying to read work 🙂

    • I can’t remember either but my suspicion is that Europe/Greece had something to do with it.

    • Maybe the alleged ‘mistaken fat finger’ trade of dumping billions of shares instead of millions?

    • yep first murmurings of PIIGS. or at least the realisation by moronic politicians that the EU periphery is bankrupt

    • I would also gather they have had to accept they now have to compete on price.

      New credit issuance is insignificant, and I do foresee a scramble by the big 4 to get customers of the non-bank lenders, and small players now.

      • all banks have internal funding rates, which calculated on daily basis.

        the main reason for CBA/60bps, WBC/20bps cut is driving by inverted yield curve, which is declining on funding costs.

        of course, competition is always there. but, no money lossing here.

    • Deus Forex Machina

      guys don’t forget that there are two seperate things happening when a bank does this…

      the retail bank goes to treasury and says i’m not getting any traction with variable rates can we do a flash fixed rate…

      treasury says, yeah sure, rates have rallied here is you transfer price…they manage the risk and the retail bank gets its sales force to market and retail the home loan

      it certainly helps that 3 year margin between swap and the new westpac fixed is 250 bps not the usual 200/210…so a bit more fat for treasury to manage with and probably give some to the retail side

      BUT I reckon its just a retailing play, cant originate new loans any other way

      my2c anyway

  4. Reeckon the markets are pricing a banking blow-up pretty soon, given the rumours around a few of the Euro and US players.

    I think a Euro bank will go before one of the sovereigns.