This past week was quite interesting, as well as volatile. On Monday, we had a huge gap up right int...
LIBOR climbs and bank stocks fall--what else is new?
05/25/2010 1:46 pm EST
Dollar LIBOR, the London Interbank Offered Rate that banks pay for short-term loans in dollars, climbed to 0.536% from 0.510% yesterday. That’s the 11th day in a row that LIBOR has climbed higher. Today’s level is the highest since July 7, 2009.
As you remember from my post on LIBOR yesterday (http://jubakpicks.com/2010/05/24/worry-over-shaky-euro-banks-pushes-up-interest-rates-threatening-the-global-economic-recovery/ ), LIBOR is a daily average based on a survey of 16 banks. Besides heading upward in general that average shows in increasingly large spread between the most and least stressed banks over the last two weeks.
A rising LIBOR reflects fears that some banks aren’t good risks even over a period as short as overnight. To compensate for any added risk, the market charges more for its short-term money.
But right now a rising LIBOR also testifies to two other fears.
First, that the proposed financial reform package now wending its way through the U.S. Congress will add to the cost of money for U.S. banks.
Second, that the central banks that have kept the hose open and flooded the market with short-term dollar liquidity are starting to reduce that flow of cash.
I think the first fear is mostly groundless. Congress isn’t going to do anything especially radical while the global economy threatens to stumble again. I expect that the bill that finally emerges from the House/Senate conference committee—after Wall Street’s lobbyists have reminded members of Congress of who contributed to their last election war chest—will be much more moderate than Wall Street fears and that many of the rest of us hope.
The second fear is, if not groundless, at least overblown. The European Central Bank and the Federal Reserve aren’t going to let a few hundred billion in liquidity threaten all the progress that’s been made so far to put the global financial and economic crisis to rest. I suspect that even as I write this comforting phone calls are going out to key bankers signaling the central banks’ intention to supply dollar liquidity as needed. The European Central Bank has been somewhat slow off the mark in making dollars available from its lending window in the last couple of weeks. But I suspect that “error” is even now getting corrected.
Nothing like a crisis to focus a central banker’s attention.
And we’ll worry about how to sop up all this extra cash another day.
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