What rate cut? Interbank lending rates keep rising
NEW YORK — Governments around the world have slashed interest rates and ramped up their lending to unprecedented levels, but banks are still charging each other extremely high borrowing rates — a bad sign for the credit markets that remain close to paralysis.
Traders will be closely monitoring the G-7 finance ministers meeting this weekend, and hoping the officials will consider guaranteeing lending between banks — which could potentially bring down the relentlessly high key lending rate London Interbank Offered Rate, or Libor.
"That would go a long way for confidence," said Kevin Giddis, managing director of fixed income at Morgan Keegan.
The ministers also might consider collectively guaranteeing bank deposits, allowing central banks to become clearing houses in cash-for-collateral transactions, or creating a super sovereign wealth fund, said Tony Crescenzi, analyst with Miller Tabak & Co., in a research note.
Though set in London, Libor has implications for U.S. borrowers. The rate is used to set interest rates on debt ranging from corporate loans to house mortgages.
The Libor for three-month dollar loans jumped to 4.82 percent on Friday from 4.75 percent Thursday. Just a month ago, three-month Libor was at 2.82 percent.
Libor is the rate at which banks make unsecured loans to one another. Investors in the stock market, where heavy selling continued Friday, aren’t going to get any relief until bank-to-bank lending rates come down. The rate is directly tied to many consumer loans, including adjustable-rate mortgages. If those rates rise, that means more mortgage defaults and foreclosures.
The difference between three-month Libor and the three-month T-bill yield swung to its widest level in more than 25 years — indicating that banks are viewing loans to other banks as significantly more risky than government debt. The yield on the three-month T-bill fell to 0.21 percent from 0.58 percent late Thursday.
It’s not that banks aren’t lending at all — it’s that they’re doing so for shorter periods of time, to fewer borrowers, and at higher rates.
"There’s a lot of activity that’s all been jammed up into overnight lending," said Lou Crandall, chief economist at Wrightson ICAP. This is tolerable for banks because they have a safety net from regulators, he said, but non-bank institutions are at risk. That’s because they have to resell their debt every night or couple of days, and if they’re unable to do so on a given day, it could result in a big loss.
Filed under: business by Wolf