Libor Rises and Bank Stress Measures Worsen

Ah, when you thought the news from equity markets was bad enough, we get a second helping on the interbank front. From Bloomberg:

The cost of borrowing in dollars overnight in London rose as the increased likelihood of a global recession spurred banks to hoard cash even after policy makers pumped record amounts of the U.S. currency into financial markets.

The London interbank offered rate, or Libor, that banks charge for such loans climbed 7 basis points to 1.28 percent today, British Bankers’ Association said. It gained for the first time in 10 days yesterday. The comparable rate for U.K. pounds jumped 19 basis points to 4.75 percent. The Libor-OIS spread, a measure of cash scarcity, widened by the most since Oct. 10.

“The level of activity in the money markets remains significantly below standard norms and subject to sporadic abnormalities that can only be a function of illiquidity,” said Charles Diebel, head of European rates strategy at Nomura International Plc in London.

The thaw in lending that began earlier this month after policy makers pumped cash into money markets and governments bailed out banks may be faltering as the global economy slides into a recession. Credit markets froze after the bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15 as financial institutions hoarded cash on concern more banks would fail….

The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, widened 8 basis points to 262 basis points today. It was at 364 basis points on Oct. 10, widening from 354 basis points a day earlier. A basis point is 0.01 percentage point.

The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, was at 261 basis points, up from 257 basis points yesterday. It was at 112 basis points two months ago.

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  1. wintermute

    I firmly believe that The Fed funds rate should be set to match dollar Libor – to mirror it as closely as possible.

    Interest rates have got to be set by markets as only markets can determine the true price of money.
    (Same medicine for UK and Europe)

    Much of the systemic stresses in the bond and money markets would ease off. It is the only way to get back to a sound basis for the financial system.

  2. Anonymous


    You contradict yourself,
    LIBOR and The fed funds trading level are ‘set’ by the market. If they were forced to be the same it would need to be imposed by something other than the market.

  3. FairEconomist

    I think the Fed Funds rate should be targeted about 0.5 points *above* LIBOR, although LIBOR has problems since it’s a fictitious rate. Fed Funds is supposed to be a “penalty” rate for banks that mess up their cash flow, not a basic support for the economy. Long-term interventions should be via open market operations.

  4. Terminal

    I may get some grief for pointing this out, but Bloomberg publishes Libor-OIS spreads according to a unique convention.
    According to the more widely used convention,used by the FT and Thomson-Reuters among others, the 3M Libor-OIS spread widened double digits today not only for the dollar but also for the euro and sterling.

  5. S

    Libor in theory should be a mirror on the market via the banks but that just makes it yet another ward of the state these days.

    The US is in the process of looting the rest of the world, albeit acting perfectly in its self interest (as it makes noise about protectionism). There is no way the EM are going to take it lying down. So the US gets dollar up and inflation down (and a printing window), while EM people move back to the brink and see their hard won savings/reserves destroyed.

    War seems a clear and present danger. There is no free lunch

  6. JeanClaude

    TO S:

    What are you talking about? Big Bully US looting Europe, putting those poor hard working souls back to the brink….the clear and present danger of war?

    Gimme a break.

    Britain’s entire economy is predicated on the financial engineering which paved the way for this mess.

    Ireland, Spain and Italy—are these paragons of fiscal restraint? Their real estate markets are just as out of whack as the US market.

    Eastern Europe—how about a healthy dose of “carry trade mortgages” brought to you by the princes of virtue from UBS and Deutsche Bank. Hell, 1/3 of Poland’s mortgages are financed on borrowed yen and/or Swiss francs and 1/2 in Hungary. Talk about real estate insanity.

    And how about those poor innocent victims at Societe Generale…getting snookered by one of it’s own low-level traders. No doubt, the guy wached CNBC, so it’s the US’ fault.

    Have you looked at the books of the Euro-Major Banks? The IFRS allows for at least as much opacity as GAAP. These banks are leveraged at least as much, if not more than C, JPM, etc. But somehow, this is irrelevant in a narrative where the US rapes pillages and plunders.

    And finally, war? Even if your US-Looting Thesis was correct (which, again—is laughable), do you really think the E.U. would muster the constitution to actually do something about it? What’s next—“Oh no! Europe is unleashing those Demons of Terror…the Soldiers of Righteousness…the feared United Nations!”

  7. S

    Europe is an after thought for almost everyone except you. Agree with you that France and the rest of Europe is good for little more than flag waving and talking.

    The point was not to belabor the leverage in the system or the euro financial institution leverage. yes i have looked 40x blah blah blah. Isn’t that the point? Where exatly is the money going to come from when the reflation fails dismally (as it seems to be) or results in the global hyperinflationary kick off that if memeory serves was a proximate cause of WWII. Must be a reason why weeks after the settlement of the georgia settlement the Russian and US generals are meeting in Finland. The Middle East is about to explode with israel and Leb and Hez trading recriminations and Iran threatening a pre-emptive strike? The Chinese are building nuclear subs, atack satellites and carriers. Oh then there is Pakistan. The world stop caring about France after Dien Bein Phu. the Britich marines did themselves no favor being paraded around by the iranians either.

    The only thing laughable really is your inability to anwser the question. here is the paradigm: the emerging world’s capital has been rolling uphill to subsidize the leverage across the developed world. Now the entire world as you correctly point out is saddled with suffocating bad debt while the remaining capital is either burried in the ground or in the reserve coffers of the developing world. And nobody seems to be willing to give away their capital (OPEC cut, production cuts etc.).

    How does the US printing treasuries and reflating the US (dollar strength as a result perversly) help the emerging world? Do you think they regret and or harbor some resentment to the bretton woods II arrangement?

    Fool me once shame on you fool me twice shame on me. I’ll say again war / conflict is clear and present danger.

  8. bg

    Hoarding cash seems rational in an asset deflation. Is it really understood that helecopters can always stop this? Is there always a potential escape velocity for liquidity? To follow the metaphor one more level, is it not possible for ‘black holes’ to exist where hoarding cannot be prevented until asset prices fall and the black hole collapses?

  9. doc holiday

    What a shock that TARP-like taxpayer bailout cash will end up being hoarded by illiquid banks that made too many loans to gamblers at the derivative casinos. Thus, Taxpayers give, banks take and then banks will ask for more, because they don’t want to account for the losses in the casino! Thus, Taxpayers need to prepare to give more, in an infinite cycle of unregulated stupidity and greed Very weird really.

    This reminds me of something … like maybe The Boston Tea Party or something… hmmm?

  10. JeanClaude

    To S:

    You make some damn good points. I have to admit when I’m wrong, and I am wrong.

    I read your inital post as though it was mainly concerned with Europe—and that it was somehow an innocent victim.

    Victimization is essentially irrelevant. I see your point that the emerging market will look at the hand it’s been dealt and see it’s a bad one…hence the resulting instability.

    Fair enough. My apologies and appreciation for standing me correctly.

  11. Rosabarba

    You're a hard lady to cheer up, Yves, but you write a first-rate blog.

    Now that we have some more Friday FDIC bank takeovers, I'd love it if you would re-examine the cause for the huge cost, relative to deposit base, that these takeovers are costing the feds.

    Alpha Bank & Trust, on $354 million in assets, will cost the FDIC $154 million. Amazing and depressing.

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