Central Banks Frustrated by Libor … NYBor? A NYBor/OIS Spread?
Central Banks Ponder Dollar-Debt Rate
By JOELLEN PERRY in Frankfurt, GREG IP in Washington and CARRICK MOLLENKAMP in London
May 2, 2008; Page C2
Central banks on both sides of the Atlantic are debating causes of the surge in interest rates on commercial banks’ dollar-borrowing in money markets and considering what they can do about it.
![[Ben Bernanke]](http://s.wsj.net/public/resources/images/HC-GG945_Bernan_20070329150953.gif)
A major source of stress has been the London interbank offered rate, or Libor, a benchmark for the rates banks pay on dollar loans in the offshore market. It remains unusually high compared with expected Federal Reserve interest rates, an indication that banks continue to hoard dollars.
Central banks have already taken steps to ease European banks’ dollar-denominated funding needs, but the resurgent tension has policy makers discussing whether the current arrangements are enough.
The Fed already has agreed to swap as much as $36 billion with the European Central Bank, headed by Jean-Claude Trichet, and the central bank of Switzerland for their currencies. The dollars are then lent to European and Swiss banks, which need them to pay down dollar-denominated debt, for example, and to have for securities businesses. But with dollar-denominated funding rates still rising, global central banks’ tactics don’t appear to be working.
There are disagreements about why the rate is rising. Fed officials attribute the recent Libor rise to European banks’ needing to borrow in dollars, because the pressure tends to slacken around midday in the U.S. when the European day ends. U.S. banks have tended to retain their dollar holdings until the end of the day in New York, making it even harder for overseas banks to obtain dollars.
European officials aren’t convinced demand from European banks for dollars is the source of the trouble. Since March 11, the amount on offer at ECB’s swap line has been a relatively modest $30 billion. In each of three $15 billion auctions it has held since then, demand hasn’t been overwhelming, suggesting to some European officials that European banks aren’t desperate for dollars. The ECB also saw prior global central-bank maneuvers as partly a symbolic effort to try to calm markets.
Still, newly elevated rates in the interbank are prompting discussions among central bankers about possible solutions. Options on the table for the ECB include making more than the current $30 billion of dollars available, as well as extending the term of the swap line beyond the current Sept. 30 deadline.
In the U.S., Fed officials continue to consider steps they might take and cited “ongoing measures to foster market liquidity” in the statement accompanying their interest-rate cut Wednesday. The Fed could expand its term auction facility, which lends $100 billion for 28-day terms to banks against a wide variety of collateral, or lengthen its term to three or six months. Similar moves could be taken via regular open-market operations, in which it lends to securities dealers against high-quality collateral for up to 28 days.
The Bank of England hasn’t so far joined forces with the Fed to provide dollars directly to British banks. But it is involved in the central-bank discussions about reducing tensions in the Libor market.
Write to Joellen Perry at joellen.perry@wsj.com, Greg Ip at greg.ip@wsj.com and Carrick Mollenkamp at carrick.mollenkamp@wsj.com
http://online.wsj.com/article/SB120967584946260607.html?mod=2_1569_leftbox
ICAP to launch US rate alternative to Libor
Reuters
A reliable Libor alternative has generated some market buzz, but it is too early to use NYFR to trade and to underwrite loans. “We’ll follow it, …
Libor’s Guardian Bristles At Bid for Alternative Rate
ICAP Plans Rival Index to Libor for US Bank Rates (Update2)
Icap stirs Libor debate
LON:IAP
CAP to launch U.S. rate alternative to Libor
By Richard Leong
NEW YORK (Reuters) - A top bond broking firm plans to launch an alternative U.S. rate benchmark to the London interbank offered rate, whose reliability has been questioned during the current global credit crisis.
ICAP (IAP.L: Quote, Profile, Research) said on Thursday its survey of borrowing rates between U.S. banks, called the New York Funding Rate, or NYFR, is intended to address the shortcomings of Libor cited by traders and analysts.
NYFR will reflect banks’ estimate on the market rate to obtain unsecured funding from each other, rather than the rates at which banks say they are borrowing, which Libor measures.
“By changing the parameters, we will get a different perspective,” said Lou Crandall, chief economist at Wrightson ICAP. “Whether it NYFR.L is accurate, the players will know.”
A reliable Libor alternative has generated some market buzz, but it is too early to use NYFR to trade and to underwrite loans.
“We’ll follow it, but it’s premature to think about switching to it on Day One,” said Colin Lundgren, head of institutional fixed-income at RiverSource Investments in Minneapolis. “It is reasonable to say it would take a year or two for it to catch on.”
DEVELOPING AN ALTERNATIVE
ICAP already publishes Eurodollar rates, which are reflected in dollar Libor, on news and data terminals from Bloomberg, Thomson Reuters (TRI.TO: Quote, Profile, Research) (TRIL.L: Quote, Profile, Research) and other information vendors. Those rates are cited by the Federal Reserve in its daily survey of U.S. interest rates.
Crandall said, however, the NYFR is not intended to displace Libor as a rate benchmark. Trillions of dollars of loans and financial instruments around the worldwide are pegged against Libor.
Doubts about Libor grew earlier this month after The Wall Street Journal reported banks contributing dollar quotes to daily fixings had been under-quoting the true cost of funds to avoid being labeled as desperate for cash.
The British Bankers Association has taken steps to assure the market about Libor’s accuracy, including the expulsion of any bank from its rate survey if it is found acting improperly.
“The BBA will ensure that dollar BBA Libor continues to be a transparent, objective, accurate rate,” said John Ewan, director of BBA LIBOR with the London-based banking group.
“Commercial providers trying to emulate the BBA LIBOR fixing process for any region would need similar support and commitment from the markets and would have to meet BBA LIBOR’s standards for transparency if it seeks to win the market’s confidence,” Ewan said in a statement.
NYFR differs with the Libor system by offering anonymity to the banks surveyed.
“We are asking for a generic market rate … The anonymity makes it useful from an information perspective,” Crandall said.
That transparency, under which all the rate postings by banks are made public, has become a liability for Libor, according to Crandall. “In times like these, this could be a drawback,” he said.
Other NYFR features that differ from Libor:
– The survey will be conducted at 9:30 a.m. New York time and the NYFR rates will be generated at about 10 a.m. This compares with 11 a.m. London time, or 6 a.m. in New York, when the BBA sets Libor in all currencies.
– ICAP will collect rates on 1- and 3-month overseas dollar deposits. BBA’s dollar Libor rates go out to 12 months.
– NYFR will encompass unsecured bank funding sources such as certificates of deposits, money market mutual funds and government-sponsored enterprises. Libor is explicitly defined as an interbank deposit rate.
http://www.reuters.com/article/managerViews/idUSNOA22630120080502
Libor’s Guardian Bristles
At Bid for Alternative Rate
U.K. Bankers’ Group
Says Review Due Soon;
Need for Confidence
By CARRICK MOLLENKAMP
May 1, 2008 1:50 p.m.
LONDON — The group that oversees a widely used interest rate fired back Thursday at an effort to introduce an alternative to the rate, known as the London interbank offered rate, or Libor.
In recent weeks, the British Bankers’ Association, which calculates Libor, has faced questions about the accuracy of the rates that a 16-bank panel submits to reflect their dollar-denominated borrowing costs. The group said a review of how Libor is calculated “is due to report shortly,” though it declined to offer an exact date. It also noted that any substitute for Libor — which is supposed to reflect the rates at which banks make short-term loans to one another — would have to meet high standards to “win the market’s confidence.”
On Wednesday, ICAP PLC, a London broker-dealer with offices in New York, said it plans to launch a new measure of the rates at which banks borrow dollars. ICAP expects to begin publishing the rate, known as the New York Funding Rate, or NYFR, as soon as next week, said Lou Crandall, chief economist at Wrightson ICAP, a New Jersey research firm that is part of the ICAP group. Mr. Crandall said NYFR isn’t intended to replace Libor.
One of the world’s most important financial indicators, Libor forms the basis for interest payments on tens of trillions of dollars in individual mortgages, corporate debt and derivative contracts around the world.
Bankers have become concerned the continuing credit crunch means some of their rivals might not be reporting their true high borrowing costs, for fear of looking desperate for cash. The BBA, through Thomson Reuters, publishes each bank’s rates every morning in London. Another concern is that amid the recent financial turmoil, few banks have been lending beyond one month, which means that their reported rates for loans of three months and longer are largely a guess.
ICAP, which intends to survey some 40 banks about one-month and three-month borrowing costs, plans to provide contributing banks anonymity, which it hopes will encourage the banks to be candid. ICAP will ask banks what a “representative bank” would pay for a range of funding, including deposits and short-term IOUs known as commercial paper. The survey will take place at 9:30 a.m. New York time, when the U.S. lending markets are open. One criticism of the BBA system is that the survey takes place at 11 a.m. in London, before the opening of the dominant U.S. market.
In its statement Thursday, the BBA said the Libor system depends on participation from banks, brokers, exchanges and hedge funds. “Commercial providers trying to emulate the BBA Libor fixing process for any region would need similar support and commitment from the markets and would have to meet BBA Libor’s standards for transparency to win the market’s confidence,” the statement said.
Two weeks ago, several reports, including one in The Wall Street Journal, raised questions about Libor. The BBA subsequently said it had started its review of the Libor system. The BBA’s announcement led to a sudden rise in dollar Libor rates, although they have since eased somewhat.
On Thursday, the three-month dollar Libor was 2.78%, down from 2.85% Wednesday. The U.S. Federal Reserve cut its target for the federal-funds rate to 2% from 2.25% on Wednesday.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com
http://online.wsj.com/article/SB120966299679159903.html?mod=googlenews_wsj
ICAP Plans Rival Index to Libor for U.S. Bank Rates (Update2)
By John Glover and Gavin Finch
May 1 (Bloomberg) — ICAP Plc, the biggest broker of transactions between lenders, is planning a new measure of U.S. bank rates as the accuracy of the London interbank offered rate, or Libor, is called into question.
The new index, to be known as the New York Funding Rate, or NYFR, will be based on an anonymous daily survey of at least 24 banks, according to Lou Crandall, chief economist at the company’s research unit. NYFR would be the average of the middle 12 quotes from that group, according to a release e-mailed to Bloomberg News.
Libor, used as a benchmark for debt around the world including the $1.21 trillion-a-day market for interest-rate swaps, is near the highest relative to the Federal Reserve’s target rate since 1999. Banks have complained that participants may be submitting inaccurate information to the British Bankers’ Association amid the global credit squeeze and that their rates don’t reflect borrowing costs in the U.S.
“There is a wedge that’s being developed which means the cost of borrowing funds for the domestic U.S. banks is less than Libor,” said Jeremy J. Siegel, finance professor at the University of Pennsylvania’s Wharton School of Business in Philadelphia. “Basing their loan rates on the New York borrowing rate is a very good idea.”
Libor for three-month dollar loans fell 7 basis points to 2.78 percent today, the BBA said. That’s 78 basis points more than the Fed’s target rate. The gap has widened from an average 11 basis points in the first half of 2007 and remains close to the peak of 86 basis points in December.
Exclusion Threat
The BBA asks 16 member banks including Barclays Plc, HSBC Holdings Plc and four other U.K. lenders how much it would cost to borrow from each other for 15 different periods in currencies including dollars, euros, Swiss francs and pounds. It then calculates averages and publishes the results every day after 11:30 a.m. in London. Only three of the member banks are based in the U.S.
The BBA said last month it will speed up a review of the daily “fixing” process. Chief Executive Officer Angela Knight said on April 16 that the BBA would ban any members that deliberately understate the rates they pay. Libor for three- month loans in dollars jumped 9 basis points the next day, the most since August, to 2.82 percent.
“Commercial providers trying to emulate the BBA Libor fixing process for any region would need support and commitment from the markets,” London-based BBA Director John Ewan said in a statement today. They “would have to meet BBA Libor’s standards for transparency if it seeks to win the market’s confidence.”
`Stigmatized’
ICAP will introduce its new gauge as early as next week, the Wall Street Journal reported earlier today.
“In light of the confusion over dollar Libor levels in recent months, customers have asked if a more objective gauge of unsecured bank funding costs could be created,” Crandall said in the release.
ICAP will ask participants to estimate the cost of funding for a “representative” bank rather than for their own institution, Crandall wrote. Individual responses will be kept confidential to encourage participation and to avoid the risk of any one bank being “stigmatized” as having problems obtaining funding, he wrote.
The survey will take place at 9:30 a.m. in New York. The London-based company will ask for estimates of the mid-rate between interest bid and offered. Rates will be collected for one-month and three-month maturities, he said.
Transaction Rates
“The problem with Libor is that it’s reported by banks rather than actual transaction rates so there is a concern that it may not accurately reflect the rates at which banks actually are willing to lend to each other,” said Richard McGuire, a fixed-income strategist in London at Royal Bank of Canada, the nation’s biggest lender. “This would be of crucial importance as we feel our way towards perhaps the bottom of the credit crisis and are looking for signs that counterparty risk may be diminishing.”
– With reporting by Liz Capo McCormick in New York and Agnes Lovasz in London. Editor: Cecile Gutscher, Gavin Serkin.
To contact the reporters on this story: John Glover in London at johnglover@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net
Last Updated: May 1, 2008 12:35 EDT
http://www.bloomberg.com/apps/news?pid=20601087&sid=aGgzlPYd0NPw&refer=home
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http://www.hedgeworld.com/news/read_news.cgi?section=peop&story=peop3451.html
LIBOR Volatility May Signal Reign End
By Emma Trincal, Senior Financial Correspondent | Tuesday, April 29, 2008
NEW YORK (HedgeWorld.com)—The Federal Reserve Board will decide on Wednesday [April 30] whether to pursue its policy of monetary easing or pause, causing attention to turn to the London Interbank Offered Rate as a key indicator of what the market is thinking. But the market is confused, LIBOR’s reliability has come under attack.LIBOR measures the rate at which large banks lend to each other in the London market across 10 currencies and 15 lending periods ranging from overnight to one year. It is a leading global credit benchmark used to price mortgages, bonds, loans and derivatives and the rate at which banks make unsecured loans to one another. It acts as a barometer of risk in the financial markets, “LIBOR is by far the most popular floating-rate index in the world,” wrote Scott Peng, head of U.S. rates strategy at Citigroup Inc., in a recent report.
But many now question the benchmark’s credibility amid a dysfunctional interbank market. Some even say that the days of this closely watched benchmark are numbered.
Such is the impact of a global credit crunch that it may not only precipitate the fall of landmark financial institutions but also lead some to question the credibility of the tools they routinely use to price their investments and make their bets.
The problems with LIBOR are twofold and have gone through two stages.
The first setback, now about to be resolved, was abnormally LIBOR rates, which led the market to question the index’s credibility. The low rates did not appear to accurately reflect actual bank lending levels, which were assumed to be much higher.
The second part of the recent LIBOR crisis has taken place over the past two weeks. Since mid-April, the interbank market has seen a correction, with LIBOR soaring. This correction was both good and bad. On the positive end, rates are now closer to their fair value. For Mr. Peng, LIBOR’s rise indicates that a recovery in interbank liquidity is under way. The bad news is the benchmark’s sudden volatility doesn’t play well with derivatives and futures traders. As a result, many are considering the idea of finding an alternative benchmark to LIBOR.
LIBOR’s Credibility Under Attack
Until mid-April this year, bankers, traders and academics noticed that the three-month LIBOR was too low to reflect the reality of the credit crunch characterized by increasingly tight credit conditions. For instance in April 2007, before the subprime crisis, three-month LIBOR was at 5.36% according to Bloomberg. A month ago, more than six months after the first signs of credit turmoil, the rate was considerably lower, at 2.7%.
This was illogical. When banks have trouble borrowing as credit gets tighter, the rate should go up, but it did not.
Speculation was that the 16 banks that report their funding costs daily to the British Banker’s Association—the organization that sets LIBOR through a survey—may actually have understated the rate at which they borrowed from other banks as a way to conceal their true funding costs. Indeed, the dramatic episode of Bear Stearns Cos. Inc. going under in just a week after other banks pulled back their lines of credit to Bear gave credence to this assumption.
“The LIBOR levels could be the result of what happened at Bear Stearns,” said David Downey, chief executive of OneChicago LLC, an exchange that specializes in trading single-stock futures and narrow-based indexes, in an interview. “All of a sudden, it became visible that somebody was in trouble and that they had to pay higher rates.”
If banks did in fact misquote the BBA—which was never established—they may have done so for the sake of avoiding a fate similar Bear’s, or so went the market buzz until mid-April.
The disruption of LIBOR raises several questions, the main one being the role of LIBOR and perhaps the need, if it stops functioning as well as it did in the past, to find alternatives.
Prior to the LIBOR correction, Mr. Peng wrote in his report: “The current liquidity crisis has created a situation where LIBOR at times no longer represents the level at which banks extend loans to others. We believe that LIBOR may understate actual interbank lending costs by 20–30 basis points.” Even the title of Mr. Peng’s report, “Is LIBOR Broken?” reflected doubts about LIBOR’s credibility before its recent correction.
Distortion between LIBOR and real interbank lending rates is a big problem for the credit and derivatives market for several reasons. LIBOR serves as the foundation for many other short-term loan rates. It’s also a crucial benchmark for the pricing of trillions of dollars in derivatives contracts. In particular, Eurodollar futures contracts, the biggest futures market worldwide, are based on LIBOR. According to the BBA web site, around $150 trillion of global financial assets are benchmarked to LIBOR.
The uncertainty around LIBOR can also be problematic for swaps traders. “The swaps market might be adversely affected, as the correlation with other asset class declines and its status as a benchmark is called into question,” wrote Mustafa Chowdhury, head of U.S. interest rates research at Deutsche Bank, in a recent report.
One result of these doubts is that many traders have started to pay more attention to the Overnight Index Swaps as opposed to LIBOR. A breakdown in LIBOR-based funding was putting derivatives traders at risk; as an alternative, they decided to peg their swaps to the OIS, according to market participants.
LIBOR Correction Means New Problems
With LIBOR under attack, the BBA on April 16 decided to conduct its annual review ahead of time. The agenda was to determine if the BBA had the 16 largest banks that set the interbank rates in its pool. Incidentally, the BBA was also trying to restore confidence in its benchmarking methodology.
It worked. Since the BBA conducted its review, LIBOR has soared. In a month, levels have increased by almost 10% with three-month LIBOR up to 2.92% on Tuesday [April 29] from 2.66% a month ago. A rise in LIBOR is more reflective of the reality of the credit crunch as it reveals liquidity pressures in international funding markets.
The recent BBA review coincided with the rate correction. In an interview, BBA spokesman John Ewan downplayed but did not completely rule out the idea that LIBOR had been manipulated by participating banks. “I think it’s speculation to say that the banks were not reporting their rates accurately to us, giving lower rates than those they actually paid for their loans, although it’s hard to say for sure.”
The recent correction in LIBOR, while it solves some problems, introduces others. “The recent correction in LIBOR has been rapid but is a necessary part of the recovery in interbank liquidity,” wrote Mr. Peng. He added that “LIBOR’s rising to more accurately reflect actual bank lending level will help restore the balance between supply and demand in the interbank market.”
The problem is that rising rates signal a return to more volatility. The OIS-LIBOR spread is now more volatile, something that represents a predicament for derivatives players, said Mr. Chowdhury. He noted that as long as the OIS-LIBOR spread was stable, using LIBOR as the benchmark for pricing a multitude of debt instruments was suitable. But in order for swaps to be effective hedging instruments, the moves in the OIS-LIBOR spread have to be “small,” he said. “The fact that the volatility of the LIBOR-OIS basis has become quite high, and seems permanent, calls [the role of LIBOR as a benchmark] into question.”
Mr. Chowdhury predicted a reduced dependence on LIBOR as a benchmark for debt instruments and loans. The outlook is not positive, as he also found it problematic for the market to switch to a new benchmark. And the idea of using Treasuries appeared unlikely, he said, pointing out that Treasury benchmarks, such as the on-the-run Treasuries of the 1980s, or the Treasury futures of the 1990s, would not work today due to the much higher global demand for liquidity.
“Thus the market could be in for a period of confusion ahead,” said Mr. Chowdhury.
An Imperfect Benchmark
Even if LIBOR volatility decreases in the long run, with banks’ credit conditions improving, LIBOR has proven to be an imperfect benchmark.
Setting LIBOR involves mostly non-U.S. banks. Of the 16 entities that are polled, only three banks are based in the United States—Citigroup Inc., JP Morgan Chase & Co. and Bank of America.
The dominance of European banks reduces the accuracy of LIBOR because the majority of the banks on the LIBOR panel do not have full access to the liquidity programs recently offered by the U.S. Federal Reserve, including direct access for broker-dealers to the discount window lending rate, said Mr. Peng in his report.
The Fed itself could cause further disruption in the interbank market. As it has been able to progressively erase the stigma associated with financial institutions’ use of the Fed window, LIBOR may not completely reflect banks’ real cost of funding. “People go to LIBOR to finance themselves because they don’t want to borrow at the Fed window,” said Mr. Downey. “But these barriers are broken down of late.”
The same holds true in the United Kingdom, as the Bank of England made new liquidity programs and access to preferential lending rates available to British banks, following the Fed’s example.
The recent jump in LIBOR reflects higher risk premiums and the harsh reality for banks of getting short-term funding from their peers. As such, the increase could also make the Fed’s job more difficult on Wednesday. The federal funds rate—the rate at which U.S. banks lend each other money overnight—is currently at 2.25%. The market anticipates a 25 basis cut to 2%.
Talking about the possibility of three-month LIBOR rising above 3%, Mr. Peng wrote, “clearly this is not a prospect that the Fed should enjoy as rising LIBOR expectations would effectively nullify most of the economic impact of a Fed ease. This may induce the Fed to explore other avenues of liquidity injection such as quantitative easing.”
This assumption is reinforced by market expectations that the Fed is getting close to the end of its easing cycle, with Wednesday’s eventual cut seen as the last one.
Mr. Ewan said market expectations that the Fed is done with rate cuts helps explain the recent surge of LIBOR coupled with an “enormous sell-off in the futures market.”
“As LIBOR adjusts upward and begins to more accurately reflect interbank lending rates, the realized volatility of LIBOR is likely to rise,” wrote Mr. Peng.
Continued LIBOR volatility could accentuate pressures for an alternative benchmark. Or it could simply paint a more truthful picture of what the credit crunch is all about. “In the last six to seven weeks, LIBOR has been unstable as banks have been scared,” said Mr. Downey. “There’s an awful lot of uncertainty having to do with counterparty risk and how they can lend.”
http://www.hedgeworld.com/news/read_news.cgi?section=peop&story=peop3451.html
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REAL ESTATE DERIVATIVES: April 2007
Apr 5, 2007 … The ISE property derivatives market will use a mutualized auction …. the total return and makes a LIBOR (usually plus/minus a spread, …
realestatederivatives.typepad.com/
RLPC-Loan pricing to jump as banks plan LIBOR alternative …
By Tessa Walsh LONDON, April 22 (Reuters) - Loan syndicators are close to implementing alternatives to screen-based Libor rates, a move that could herald a …
www.reuters.com/article/
[PDF]
The Evolution of Corporate Borrowers: Prime versus LIBOR Patricia …
File Format: PDF/Adobe Acrobat - View as HTML
prime and LIBOR as alternative base rates and found that borrowers who were only ….. Perhaps of most interest is the presence of the LIBOR alternative’s …
www.fma.org/Siena/Papers/510073.pdf -
First LIBOR Based Reverse Mortgage Announced
October 1st, 2007 | Published in LLS, RM Products, Reverse Mortgage | 6 Comments
Lender Lead Solutions officially announced that they plan to offer a LIBOR based HECM product to their brokers. Back in July, HUD approved the use of the LIBOR index and lenders recently started talking about offering LIBOR based products ever since the HECM 100 started to disappear.
“Making the transition makes perfect sense, the LIBOR-based HECM provides brokers added margin while giving them the flexibility to structure rates and loan closing costs to meet the individual needs of borrowers,” said David Peskin, chief executive officer of Lender Lead Solutions. “The migration to the LIBOR index will be the next big trend in the reverse mortgage industry. Its attractive pricing is better for our brokers and creates less interest rate risk for lenders like us.”
http://reversemortgagedaily.com/2007/10/01/first-libor-based-reverse-mortgage-announced/
A loss of faith in Libor?
With Libor stuck obstinately at levels well above official bank rates, the latest speculation surrounds whether the interbank lending rate should in fact be higher.
The suspicion is that banks’ are managing the reports of their short-term borrowing costs downwards in order not to appear desperate for funds.
The WSJ adds, while acknowledging that there is no specific evidence that banks have provided false information:
The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That’s good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.
Scratch that. It’s bad for everyone, says Yves Smith. Doubt about Libor throws the TED spread into doubt, which as the difference between Libor and ninety-day Treasuries is a popular measure of stress in the interbank markets. It means that ugly as that market has looked this year, it’s actually uglier.
When these staple statistics and benchmarks are called into doubt, the uncertainty and ensuing difficulty in planning means another deterrent to investment.
The BBA, which oversees Libor, reviews the composition of the rate and the “panel” of banks that send in data annually. This year’s review will finish in June. Libor will almost certainly be discussed at a BBA board meeting on Wednesday, although the meeting is a regular, scheduled one.
But doubts about the official Libor rate may be masking, or at least muddying, changes in the markets which us the benchmark as a reference.
Tom Freke, from Loan Radar, notes that even if banking not funding at Libor is a blip, it is having effects on loan pricing. If Libor plus 50bp, no longer gives the banks 50bp over the rate they are funding at, investment grade funding is going to have to rise both against the tarnished reference rate and overall.
One move would be for banks to use an alternative reference from which to price their wares. Freke thinks a better alternative doesn’t naturally present itself. The WSJ offers up the rates set by central banks for loans and the rates on repo agreements. Would those work? The latter has had its own troubles.
Derivatives signal Libor rise
The direction of interest-rate derivatives suggests that the rate that banks charge for loans in dollars in London may rise further as financial institutions remain reluctant to lend, reports Bloomberg. The difference between the rate of three-month loans in London relative to the overnight index swap rate (the Libor-OIS spread) is 88bp, near the year high of 90bp reached April 21. The London interbank offered rate, or Libor, for dollars climbed on speculation that lenders have manipulated the rate to curb borrowing costs. The British Bankers’ Association said last week it would speed up a review of the daily Libor-setting process and ban any member providing misleading quotes.
This entry was posted by Gwen Robinson on Thursday, April 24th, 2008 at 5:30 a
http://ftalphaville.ft.com/blog/2008/04/24/12551/derivatives-signal-libor-rise/
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NYbor?
They say the only time the British consider themselves European is during the Ryder cup. Also perhaps, when reading the Wall Street Journal:
Libor Hits US Borrowers
The troubles of banks in Europe are pushing up an interest rate widely used in the U.S., prompting the idea of a U.S.-based alternative to that rate, known as the London interbank offered rate, or Libor… That means the financial difficulties of European banks are having an outsized effect on U.S. borrowing costs.
This whole banking crisis. Utterly our fault chaps.
For those who missed it, London is also to blame for SIVs - and the “snarl in global markets”. (And for those unfamiliar with “London”, here’s an informative explainer).
But, trying to put patriotism aside there are perhaps, a couple of quick - and perhaps shallow - reasons why it wouldn’t make much sense to bother with a “NYbor”.
Firstly, it’s all relative. As a benchmark, higher Libor might well be costing some American banks money overall, but it will also be earning other American banks money.
Further, if the average American bank is willing to lend at a level lower than the average European bank, there’s nothing to stop them doing so. Libor is, afterall, a purely indicative measure. But the real issue is perhaps, not about short-term liquidity costs - and with those, systemic risk of overnight insolvencies - at all. Overnight or short term loans, repos etc. can be made at whatever rate a bank wants. The issue with high Libor seems more like one, then about high funding costs in the fixed-income side of things. Banks don’t like the high funding costs on debt instruments with coupons tied to Libor. That’s not a case for radical change. It’s just grumbling about stumping up the cash. ‘Banks want to pay less interest’ - shock.
Secondly, everything is pegged to Libor. Whatever its failing, it’s a universal standard. The hassle of creating another measure is surely more effort than it’s worth. And if you’re an investor - with, presumably, the upper hand in this market - why would you buy a coupon pegged against unreliable, new-fangled ‘Nybor’, when you could get one pegged against the higher paying, and more tested, Libor?
Back though, to the blame game. Also from the Journal:
Analysts attribute the sharper rise in European banks’ borrowing rates to the fact that they’re scrambling for dollars to pay off dollar-denominated debts.
Dollar-denominated debts? Those wouldn’t be subprime, would they?
This entry was posted by Sam Jones on Wednesday, April 23rd, 2008 at 9:43
http://ftalphaville.ft.com/blog/2008/04/23/12530/nybor/
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Dollar Money-Market Rate Jumps on Threat to Ban Banks (Update2)
Bloomberg -
The so-called Libor-OIS spread widened 8 basis points to 86 basis points, the most since Dec. 13. It averaged 8 basis points in the first half of 2007. …
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Fed’s New Loan Auctions Failed to Reduce Premiums, Study Finds |
Three-mth dlr Libor at 5-wk high, Fed rate cut bets trimmed
Forbes, NY -
“But the fact the LIBOR/OIS spread is wider shows it is not all to do with rate expectations.” The difference between London interbank offered rates and …
Trichet Not Ready to Cut Rates Even as Risks Mount (Update5)
Bloomberg -
The so-called Libor-OIS spread was at 74 basis points today. It averaged 6 basis points in the first half of 2007. “Even with the ECB rate unchanged, …
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Treasuries Fall as Stocks Rebound Saps Demand for Safest Assets |
SCOREBOARD: Déjà vu
Business Spectator, Australia -
The US 3m LIBOR-OIS spread has been trending wider of late, and was -1.2bps to 78.6bps last night – though given the selling in EDs, you’d expect LIBOR to …
Dollar Money-Market Rate Jumps on Threat to Ban Banks (Update2)
By Agnes Lovasz
April 17 (Bloomberg) — The cost of borrowing in dollars for three months rose the most since August after the British Bankers’ Association threatened yesterday to ban members that deliberately understate the rates they pay.
The London interbank offered rate, or Libor, for dollars climbed 9 basis points to 2.82 percent, the BBA said today. The overnight rate fell 2 basis points to 2.66 percent.
Participants have complained that banks may be submitting inaccurate information amid the global credit squeeze, Angela Knight, chief executive officer of the London-based BBA, said yesterday. The BBA will exclude banks that give misleading quotes and plans to speed up a review of the daily “fixing” process by which borrowing costs are determined, it said.
“The BBA’s comment was a warning to contributors that any manipulation wouldn’t be tolerated and it had a pretty dramatic impact,” said Barry Moran, a money-market trader at the Bank of Ireland in Dublin who forecast before today’s rates were published that dollar Libor would rise by between 6 and 10 basis points.
The global credit squeeze has raised concern lenders have been manipulating the Libor fixing process to prevent their borrowing costs from escalating, the Bank for International Settlements said in March. Money-market rates began surging last year as the fallout from the U.S. housing slump left banks wary of lending to all but the safest borrowers.
Libor-OIS Spread
The difference between the rate banks charge for three- month dollar loans relative to the overnight indexed swap rate, an indication of the availability of cash, rose to the most in four months today. The so-called Libor-OIS spread widened 8 basis points to 86 basis points, the most since Dec. 13. It averaged 8 basis points in the first half of 2007.
The disparity between the three-month dollar rates banks reported today widened to 9 basis points, from 4 basis points yesterday, BBA data showed. Bank of America Corp. quoted the lowest rate, at 2.77 percent, and HBOS Plc, Britain’s largest mortgage provider, reported the highest rate, at 2.86 percent.
“I don’t think Libor is dead,” Jon Eilbeck, chief operating officer of global rates at Deutsche Bank AG, said in a speech at the International Swaps and Derivatives Association annual conference in Vienna today. “Current stress has attracted more new entrants” to markets that rely on the system, he said.
`Trouble With Libor’
Eurodollar futures contracts, which are based on traders’ expectations for three-month dollar Libor, rose today, with the implied yield on the contract expiring in June climbing 14 basis points to 2.85 percent, the highest since Jan. 18. It added 15 basis points yesterday.
The spread between Libor and Eurodollar rates suggests Libor may “modestly understate” the cost of bank borrowing by about 15 basis points, Jeffrey Rosenberg, a New York-based credit strategist at Bank of America Corp., wrote in a research note yesterday.
“The trouble with Libor lies with its essence: one borrowing rate reflects the overall rates to all panel bank members,” Rosenberg wrote. “That works when both overall bank risk is low and the dispersion of risk between banks is small. Both are clearly not the case currently.”
The June Eurodollar rate fell below the three-month Libor dollar rate today for the first time since June. The spread was 2 basis points yesterday and 16 basis points the previous day.
Ensuring Liquidity
Money-market rates also rose because financial institutions are willing to borrow at higher rates to ensure their cash positions are as strong as possible, said Christoph Rieger, a fixed-income strategist in Frankfurt at Dresdner Kleinwort, the investment bank owned by the insurer Allianz SE.
The BBA’s threat “will add to the upward drift we’re already seeing” in money-market rates, Rieger said. “Banks are trying to showcase good liquidity buffers in their reports at whatever cost they may be holding this excess liquidity. You can go bankrupt if liquidity runs dry.”
Rising money-market rates are a sign coordinated efforts by central banks to curb borrowing costs are failing. The Federal Reserve, European Central Bank, Bank of England, Swiss National Bank and Bank of Canada announced in December a concerted program of cash auctions to revive lending as the credit shortage threatened to undermine economic growth.
“Banks as part of the process are hoarding cash and that’s primarily the reason why Libor rates are elevated,” said David Pais, a currency strategist in London at Citigroup Global Markets Inc., the world’s third-biggest currency trader. “The Fed recognizes that elevated Libor is just the symptom of this malaise. I don’t see the Fed targeting Libor directly. I don’t see it take new initiatives.”
BOE Auction
A weekly auction of one-week loans by the Bank of England was more than three times oversubscribed today, the central bank said, underscoring the shortage of cash among banks. Financial institutions bid for 50 billion pounds ($99 billion), the most in three months. The central bank offered 13.7 billion pounds.
The BBA asks 16 member banks including HSBC Holdings Plc, Royal Bank of Scotland Group Plc and Barclays Plc every day to say how much it would cost to borrow from each other for 15 different periods in currencies including dollars, euros, Swiss francs and pounds. It then calculates averages published after 11:30 a.m. in London.
The three-month pound rate declined 2 basis points to 5.91 percent today, while the comparable rate for the euro increased half a basis point, to 4.78 percent, the BBA said.
The European Banking Federation also announces rates for the euro, or Euribor, gleaned from 44 member banks at about 11 a.m. Brussels time. The cost of borrowing in euros for three months rose 1 basis point to 4.78 percent today, its fifth consecutive increase and the highest level since Dec. 20, the EBF said. The rate has increased 42 basis points in the past two months.
To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net
Last Updated: April 17, 2008 12:43 EDT
http://www.bloomberg.com/apps/news?pid=20601087&sid=a.9naryC.TXg&refer=home
Credit worries, in time-honored fashion, are nurturing a second premium in lending markets. Spreads over interbank lending rates have also widened significantly. Leveraged loan rates are now higher than in June despite 100 bp of Fed ease and a similar decline in Treasury yields. The result is a one-two punch for the economy in the form of tighter financial conditions. The potential interplay between them, moreover, risks a self-reinforcing reduction in credit availability and a hike in the price.
Central bank policy actions — described briefly below — are aimed at increasing liquidity, helping market functioning, and avoiding that downward spiral. Still, skeptics argue that such actions do not solve the credit problems, balance sheet constraints, and the corresponding need for capital that institutions both here and in
In our view, the policy actions will eventually hit the target. Just the promise to resolve liquidity strains has already begun to ease them; 3-month Libor-OIS spreads have narrowed 13 bp to 87 bp in the past two days. [this was back in December] Euribor rates have stabilized and sterling Libor rates have dipped 10 bp. At the margin, these actions should satisfy the precautionary demands for cash and slowly bring down the risk premiums that threaten economic growth. The Jan 08 eurodollar futures closes suggest that 3-month Libor will decline to 4.71% by mid-January after end-of-year pressures pass. This outcome would still leave it far above the 4% funds target the market fully expects to be in place at the end of January. And challenges abound; the Fed’s direct auction of liquidity in the week ahead will be the next test. For a more thorough discussion of our views, please see our full note, “Bold Action: Central Banks Likely to Succeed,” December 14, 2007.
The 1-year correlation between IMM speculative positions and carry to …… so the 3-month LIBOR/OIS spread is expected to still be near 70bp in mid-June. …
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http://www.morganstanley.com/views/gef/archive/2008/20080103-Thu.html
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LIBOR: CME 1 Mo Libor
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CME Interest Rate
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