Wednesday 22 November 2017

Eurozone crisis prompts tighter bank credit

Keith Jenkins

The rate banks say they pay for three-month loans in dollars rose to the highest level in almost 10 months as Europe's sovereign-debt crisis made institutions reluctant to lend.

The London interbank offered rate, or Libor, for such loans rose for a ninth straight day to 0.497pc yesterday, from 0.484pc on Thursday, according to data from the British Bankers' Association (BBA), the steepest rate since July 24, 2009.

The dollar Libor-OIS spread, a gauge of banks' reluctance to lend, was almost the widest since August 13.

Libor has risen as banks become more hesitant to lend to potentially risky counterparties on concern the quality of financial institutions' collateral is deteriorating as a result of the eurozone's financial crisis.

"We're seeing risk aversion intensifying, as well as a widening of risk aversion across asset classes," said Peter Chatwell, an interest-rate strategist at Credit Agricole SA in London. "That raises concern over counterparty risk and is pushing rates higher in the interbank market."

Three-month Libor is a benchmark for about $360 trillion of financial products worldwide, ranging from mortgages to student loans.

Dollar Libor is set by 16 banks in a daily survey by the BBA before 11am in London. Contributing banks provide estimates on how much it would cost to borrow in 10 currencies for periods ranging from a day to a year.

The dollar Libor-OIS spread was 25 basis points, little changed from yesterday. The spread, which compares three-month dollar Libor and the overnight indexed swap rate, surged to 364 basis points, or 3.64 percentage points, after the 2008 collapse of Lehman Brothers Holdings.

The three-month rate had its 12th straight week of increases even after the EU announced an almost $1trn backstop to assist its most indebted members. Among the measures announced, the Federal Reserve re-opened dollar currency swaps with major central banks to ease funding pressure facing the eurozone lenders.

WestLB contributed the highest dollar Libor rate yesterday at 0.555pc. HSBC submitted the lowest dollar Libor rate, at 0.42pc.


Irish Independent

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