Libor hits lifetime low

The London interbank offered rate (Libor) that banks charge for three-month dollar loans fell below 1 per cent for the first time as credit markets showed signs of thawing.

Libor declined by two basis points to 0.99 per cent today, according to the British Bankers’ Association (BBA). The previous all-time low was 1 per cent, reached in June 2003. The Libor-OIS (Overnight Index Swap) spread, a gauge of banks’ reluctance to lend, narrowed today to the lowest level since September 1.

Libor, which reached 4.82 per cent following the collapse of Lehman Brothers Holdings in September, tumbled after the US Federal Reserve and the US government provided $12.8 trillion to bail out the banking system and spur lending.

The rate, set by the BBA in London, determines borrowing costs on about $360 trillion of financial products worldwide, ranging from home mortgages to corporate bonds.

“Confidence is returning to the market, so I would say so far so good,” said Brian Delany, a money-market trader on the dollar desk at Bank of Ireland in Dublin. “But it’s about being consistent.” The US Fed will deliver the results of the stress tests today to the executives of the 19 US banks it reviewed following a surge in losses and writedowns at financial institutions around the world.

The tests may show 10 lenders will need to raise more capital to withstand a deeper recession, according to people familiar with the matter.

After getting billions in government funds, banks will “...look more like what preceded the current environment than many people seem to believe,” H Rodgin Cohen, chairman of law firm Sullivan & Cromwell, said in a panel discussion in New York yesterday.

Financial institutions posted almost $1.4 trillion in writedowns and losses since August 2007, when banks became reluctant to lend to each other following the collapse in the US subprime-mortgage market. UBS, the European bank with the biggest writedowns, said today capital grew more rapidly than it estimated even as it reported a first-quarter loss.

“There has been a decrease in credit concerns about banks due to better-than-expected first-quarter results,” Piyush Goyal, a fixed-income strategist at Barclays Capital in New York, wrote today in a note to clients “All this bodes well for Libor and it will likely drift lower.”