The Credit Indices Itraxx overview - Source Bloomberg:
As far as the financial sector is concerned, since February Moody's has put 114 European banks on downgrade review, meaning "Real Money" is bracing for a "May impact". There is some solace for our European banks as 17of the largest banking names are as well in the "iron sight" of the rating agency: Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase, the Royal Bank of Canada and Morgan Stanley.
At the same time European Union Finance ministers are in a bind. On the 3rd of May they failed to reach an agreement to toughen bank capital rules facing stiff British resistance and aiming for a deal on the 15th May at the next meeting. The Basel Committee on Banking Supervision deadline is 1st of January 2013. Denmark is holding the current EU rotating presidency is offering a compromise with a risk buffer of 5% on banks' domestic and non-EU exposures against the initial 7% core capital requirements of their risk-weighted assets proposed by Michel Barnier, the EU's financial services chief.
But the challenge for the financial sector does not end thanks to cheap term-funding provided by the ECB twice. As Nomura indicated in their note Eurozone and Basel III - Fears for Tiers, from the 4th of May:
"-The Liquidity Coverage Ratio (LCR).
The LCR requires that a bank has sufficient liquidity to survive for 30 days under a stressed scenario when global financial markets are assumed to be in crisis, all wholesale funding has dried up, unsecured lines of credit provided by other financial institutions are withdrawn and banks experience partial deposit flight. To mitigate this risk, the LCR requires that banks hold a liquidity buffer of high quality, liquid, central bank repo eligible, unencumbered assets, which are at least equal to the amount of net cash outflows a bank may face over a 30-day period.
The liquidity buffer can comprise a minimum 60% of Level 1 assets (cash, excess reserves with a central bank, government, multilateral and selected agency debt) and a maximum 40% of Level 2 assets, which are highly likely to be spread products with for instance a 20% Basel II risk weighting. However, regulators are still debating what assets can be classed as eligible Level 2 assets (in Europe the EBA is suggesting a broader definition that would include highly liquid RMBS and – potentially – non-repo eligible assets such as listed equities and gold).