Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154242
Authors: 
Jokivuolle, Esa
Tölö, Eero
Virén, Matti
Year of Publication: 
2015
Series/Report no.: 
ECB Working Paper 1809
Abstract: 
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.
Subjects: 
credit default swaps (CDS)
early-warning indicators
Eurosystem
leadlag relationship
money markets
overnight borrowing rates
TARGET2
JEL: 
G01
G14
G21
ISBN: 
978-92-899-1622-6
Document Type: 
Working Paper

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