We construct a measure of a bank's relative creditworthiness from the
Eurosystem's proprietary inter-bank loan data: average overnight
borrowing rate relative to an overnight rate index (AOR). We then
investigate the dynamic relationship between AOR and the credit default
swap price relative to the corresponding market index of 60 banks during
2008–2013. Price discovery mainly takes place in the CDS market, but
AOR also contributes to it. The lagged daily changes of AOR help predict
CDS. This indicates that AOR includes private information, which the
CDS market does not immediately incorporate. We further show that the
private information advantage is concentrated on days of market stress
and on banks, which mainly borrow from relationship lender banks. Such
borrower banks are typically smaller, have weaker ratings, and are
likely to reside in crisis countries. Competent authorities can use AOR
as a complementary indicator of banks’ concurrent health.