The drop in the London interbank offered rate, the benchmark for $360 trillion of financial products, to a record low masks a growing gap between the rates that the biggest banks charge each other for credit.
The difference between the highest and lowest interest rates banks say they pay for 3-month dollar-denominated loans is near the widest this year, according to data compiled by the British Bankers’ Association. The spread signals that lenders still lack confidence in each other, even though measures ranging from the so-called Libor-OIS spread to corporate bond sales show credit markets have recovered from the freeze caused by the September 15 collapse of Lehman Brothers Holdings.
“It’s premature to judge that the credit meltdown is fully over,” said Kazuto Uchida, chief economist in Tokyo at Bank of Tokyo Mitsubishi UFJ, a unit of Japan’s largest bank. “Banks remain wary of extending credit to each other due to strenuous concerns about counterparty risk.”
Libor, a benchmark rate for everything from mortgages to company borrowing costs, fell to 0.66 per cent last week from 4.82 per cent on October 10. At the same time, the gap between the highest and lowest accepted quotes reported by the 16 banks that contribute to the London-based BBA for its calculation of Libor has averaged 7.6 basis points in May, according to Citigroup. That’s up from 4.9 basis points in April and 1.5 basis points in the six months before Lehman’s bankruptcy. It widened to 9 basis points on May 14, the most since December 3.
While the spread, calculated by discarding the highest and lowest four quotes before determining the mean of the remaining eight, equates to about $76,000 of interest on a $100 million loan, it represents a growing proportion of Libor as the rate declines.
On every day but 10 in the past three months, London-based Royal Bank of Scotland Group, which is under government control, submitted the highest rate in the daily survey, according to data compiled by Bloomberg.
“The dispersion of Libor submissions seems to be exceptionally wide,” said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York. “There is potential for bifurcation of the financial system between banks perceived to be healthier than others.”
Lending between banks started to freeze in August 2007, when losses linked to the collapse of US subprime mortgages left financial institutions with billions of dollars in securities and financial contracts they couldn’t value. Losses and writedowns at the world’s biggest financial companies since the start of 2007 have grown to $1.47 trillion.
Credit thaw
US companies have sold a record $600 billion of bonds so far this year, up from about $500 billion in the same period of 2007, according to data compiled by Bloomberg. Rates on 30-year fixed mortgages are about 1.8 percentage points more than 10-year Treasuries, down from 3.27 percentage points in December. Morgan Stanley’s MSCI World Index of stocks is up almost 38 per cent from its low this year in March.
While financial markets are improving, more than 60 US financial institutions have collapsed over the past two years, according to Bloomberg data. In its latest quarterly survey of senior loan officers, the Fed found that more than 70 per cent of respondents said bad loans will rise should the economy progress “in line with consensus forecasts.”
The world economy is projected to shrink 1.3 per cent this year, the International Monetary Fund said in April, reversing a previous forecast of 0.5 per cent growth.
Growing differences
Libor would have been 0.67625 percent on May 22 when including the four highest and lowest quotes, above the 0.66 percent reported rate. New York-based JPMorgan Chase & Co. reported the lowest rate, at 0.59 per cent, and Royal Bank of Canada in Toronto the highest, at 0.94 per cent.
The difference of 35 basis points was the most since Jan. 9, and up from 21 basis points a week earlier. The disparity averaged almost 58 basis points in the fourth quarter, according to John Ewan, a director of the BBA. Royal Bank of Scotland, or RBS, quoted the highest rate about 85 percent of the time since February 19, according to the BBA.
JPMorgan, which has applied to repay the funds it borrowed from the US Treasury Department under the $700 billion financial rescue package, typically quoted the lowest, BBA data show.
Spokespeople at the banks either declined to comment or didn’t immediately return calls for comment.
