The Assessment of Polish Bank Sector Condition on the Basis of Swap Spreads

Piotr Ryszard Pluciennik ()
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Piotr Ryszard Pluciennik: Adam Mickiewicz University

Acta Universitatis Nicolai Copernici, Ekonomia, 2015, vol. 46, issue 1, 7-22

Abstract: Swap spreads – the spreads between the fixed rate of IRS and the yield of treasury bonds with the same maturity are very useful measure of condition of the banking system. Spreads between WIBOR 3M and OIS contract are used in similar manner in periodical reports on stability of the financial sector. However, nearly 90% of unsecured deposits in the Polish interbank market are overnight and deposits with maturity over one month are not made at all. For this reason it is impossible to determine how the WIBOR reflects the true cost of money in the interbank market. The method we use to assess condition of the banking sector is swap spread. Parametric Markov switching models enabled us to identify two regimes, one standing for good condition of the banking system, the other for state worsened due to mortgage crisis in the United States and government debt crisis in South Europe countries. They also let us identify moments in which symptoms of the crisis became perceptible in the Polish interbank market. Markov switching models also enable us to precisely describe conditional volatility of the swap spread, which we can interpret as a measure of uncertainty as to future situation of the Polish banking sector.

Keywords: swap spread; liquidity premium; credit risk; yield curve; Markov switching models (search for similar items in EconPapers)
JEL-codes: C13 C22 E43 E52 (search for similar items in EconPapers)
Date: 2015
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