Readers like you keep news free for everyone.

More than 5,000 readers have already pitched in to keep free access to The Journal.

For the price of one cup of coffee each week you can help keep paywalls away.

Support us today
Not now
Sunday 4 June 2023 Dublin: 12°C
# European Banks
European Bank Stocks Now Just Trade Based On Their Odds Of Defaulting
How European bank stocks reacted to the collapse of Lehman Brothers.

Since Lehman Brothers went down on September 15th of 2008, European bank stocks have become remarkably correlated to their credit default swaps (CDS) according to Goldman Sachs.

Pre-Lehman, these stocks might have traded in reaction to a host of factors such as loan growth, market share, interest margins, etc.

But these days it’s almost as if they simply trade in relation to their probability of defaulting:


Since that day, sovereign and bank CDS have virtually moved in tandem – particularly so since the start of the Euro-zone fiscal crisis in late ‘09. But, as we have argued in some of our recent research, what has changed is the causality. In the immediate post-Lehman period, markets fretted about the solvency of financial institutions; the swings in sovereign CDS were very much an artifact of the worry about how a systemic banking sector shock would impact the sovereign. However, with the Euro-zone fiscal crisis, the causality seems to have mostly reversed.

Reprinted with permission from Business Insider