The bank funding market continues to be under stress. To some degree, this was anticipated, as various market participants saw signs that the year-end liquidity squeeze, and the months preceding it, would be worse than last year, which was bad enough to lead to the creation of the first special liquidity vehicle, the Term Auction Facility.
Note that if central banks, who have the greatest ability to influence short term rates and money market conditions, cannot do so via their routine liquidity measures and the new alphabet soup of Fed facilities, it it not clear that the Paulson bailout plan will have any more success. The immediate remedy would be to increase the size of the TAF.
From Bloomberg:
Money-market interest rates increased as banks sought to bolster balance sheets amid deepening concern a bailout of financial institutions won’t happen quickly enough to ease short-term funding constraints.The one-month London interbank offered rate, or Libor, for dollars jumped 22 basis points to 3.43 percent, the highest level since January, the British Bankers’ Association said today. The corresponding rate in euros rose 7 basis points to 4.91 percent and the pound rate also advanced 7 basis points, to 5.91 percent.
“There’s no real term funding markets except for central banks,” said Meyrick Chapman, a fixed-income strategist in London at UBS AG. “The Libor is meaningless. It’s for unsecured lending and there is no unsecured lending as far as I can see.”…
`We’ve seen quite a bit of upward pressure in the past couple of weeks and the fact that the TAF came in at over 50 basis points above yesterday’s one-month Libor will no doubt add to that,” said Barry Moran, a Dublin-based money-market trader at Bank of Ireland, the country’s second-biggest bank.
The difference between the Libor for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 30 basis points to 165 basis points today, the highest level since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.
To help ease the gridlock in dollar funding, the Fed arranged $30 billion in swap lines today with central banks in Norway, Sweden, Denmark and Australia.
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Respectfully, you’re missing the point on LIBOR.
Investment banks such as Lehman became dependent on short term and overnight funding to support their balance sheets. In Lehman’s case, I believe 25% of their liabilities were funded overnight.
There have been half a dozen LIBOR spikes over the last year, each of which was a valid and true signal that borrowing short and lending long might lead to disaster in the realizable future.
Instead of acting on this signal by deleveraging, selling assets, or raising equity, central banks, including the fed, added or arranged for more liquidity.
This has been disastrous, because it perversely encouraged the affected banks NOT to take the prompt actions necessary to reduce their dependence on short term money.
It has to stop. Overnight funding of questionable assets is not a right.