ECB quantitative tightening: Euribor-Overnight Index Swap spread and transmission mechanism efficiency

This paper examines whether the credit risk of banking financial intermediaries can influence the effectiveness of the monetary policy transmission mechanism. The effects are transmitted via the Euribor – Overnight Index Swap (OIS) spread. The Euribor-OIS spread is mainly explained by the credit risk and the probability of default of the panel banks participating in the Euribor. The DCC-MGARCH model confirms a significant relationship between the credit risk of the ten largest Euribor panel banks and the Euribor-OIS spread with an impact on the financing costs of the real sector. The study is based on daily data (1 June 2020 – 30 June 2023). The results of the DCC-MGARCH model are confirmed bya continuous wavelet-based analysis. The research model reveals inefficiencies in the interest rate pass-through mechanism, which calls for a continuous assessment of the Euribor reference rate mechanism, not only with regard to the transparency of interbank transactions, but also to the assessment of the credit risk of Euribor panel banks.