This post title and chart of the Euro FRA/OIS 3 month spread is from Bloomberg via Andy Lees.
FRA/OIS is a proxy for the cost of interbank borrowing. If you want to know what it means, it measures the spread between floating rate agreements and the overnight indexed swap – some instruments key to bank funding. Forget about those specifics because for the layman the point is that during the credit crisis of 2008 you could see similar changes occur during the lead up to panic. The Ted Spread and Libor-OIS spreads were good signals of liquidity constraints and funding distress in the interbank market for the American banks. See Libor-OIS spread at an all-time high from September 2008 as an example.
Today, it is euro banks that are the problem. For example, Goldman Analyst Alan Brazil suggests that euro banks need $1 trillion in additional capital. An example is a post in today’s German-language Handelsblatt about the 1.5 billion euro hole in Austrian bank Hypo Alpe Aldria’s balance sheet, a bank we have flagged as a problem in the past as a key link to the problems in Eastern Europe.
This has created distress in funding markets, particularly because of US money market funds concerned about exposure to European banks. And people are looking to track that distress Euro FRA/OIS is one way.