Thursday, Jul 16, 2009
LIBOR Down - Now What?
Telegraph: Banks and building societies under fresh pressure to cut mortgage rates
The rate at which banks and building societies lend to each other fell to the lowest level for more than 20 years.
Posted by alan @ 08:55 AM (1496 views) Add Comment
21 Comments
- If you do not have an admin password leave the password field blank.
- If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
- Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
- Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
- Please adhere to the Guidelines
1. dbc reed said...
The big push is on to get another housing bubble going before the next election.Our last line of defence against another round of house price inflation is the banks.God help us!
Vince Cable's comment that implies it is the duty of the banks to bail out the political parties by bribing homeowners and would be homeowners with cheap credit is sick.
2. paul said...
The LIBOR might be down but the LIBOR no longer correctly prices the risks associated with lending against an asset class that is rapidly falling in value.
The LIBOR is the indicator out of kilter, not the banks.
3. timmy t said...
Interest rates just reflect risk - the risk of lending to other banks is not the problem it was some months ago which is why LIBOR has fallen. The risk now lies in lending to people who want to buy houses - why would they cut rates - prices are falling and the rate of unemployment is going to soar. You don't need an economics degree to figure it out.
4. uncle tom said...
There is a logic that says "if rates are low, people will borrow more; if people borrow more, the economy revives"
However, this logic misses some key points. If people are to borrow more, they need not only low rates, but also confidence in the economy, confidence that what they are buying will hold its value, confidence that rates will remain low, and confidence that their employment is secure.
The reality is that people have very little confidence in the economy, very little confidence that house prices will hold their value, very little confidence that economic policy will prevent inflation and interest rates taking off, while redundancies and short time working loom large.
There was too much borrowing in the recent past, and people now feel it prudent to pay down their debts, if they can.
Dropping interest rates will merely draw in a small number of idiots, who will doubtless need to be bailed out later.
Vince Cable is totally wrong. The taxpayer did not deserve the banking crisis, and the rescues will probably leave the taxpayer seriously out of pocket. If, by some miracle, the taxpayer actually makes a profit, then that would be fantastic; and certainly nothing to be ashamed of.
5. flashman said...
The LIBOR has been rendered meaningless by QE. The same goes for the LIBOR TED spread. The only one worth looking at is the LIBOR OIS spread. When the spread widens then it essentially means that there is less money to lend out and also that the banks perceive more risk down the road This is why mortgage rates have recently remained stickily high but recent trading indicates that the spread is expected to narrow. The city is therefore confidence that there will soon be more mortgage lending at decent rates.
The governments know this, of course, so it is a good move to look like they were the ones who campaigned for it
6. Bearinthewoods said...
It's ironic, when the banks take too much risk and lose money they're villified by the politicians; when they lend more prudently and make a profit....they're villified by the politicians!
What is wrong with the banks builing up some liquid capital reserves? Vince Cable's comments seem to imply that as they're lending taxpayers (our) money it's all right to do so riskily and a low (non-profitable?) rates. After all it doesn't matter how much debt we're accumulating for our children and grandchildren does it? As long as we continue to support a housing market that is unsupportable the good old taxpayer (us) will pick up the bill.
On a seperate note; I, like millions of other prudent savers are already paying off the mortgages of people that were blinded by all the property propaganda thrown at the British public by Nu Labour and their toadies. What about my wellbeing? Why am I and millions like me being punished? I feel the savers of this country have been badly let down and worse, we seem to have become invisible!
One thing's for sure, Vince Cable has ensured his party won't be getting my vote in the upcoming general election.
Trouble is, anyone who stands up and says "The king has no clothes" " We have been living beyond our means for too long, now it's payback time" will be blamed for the whole mess! Because the masses are happy to live in Denialsville, Cloudcuckooland and woe betide anyone who shatters their dream.
7. growler said...
Vince Cable also knows that banks in GOVERNMENT ownership are being run in order for our Government to say they are "returning to profit" and are hence "good investments of taxpayer money" when they come to sell them back to the private sector.
By Vince asking for them to lend the money at cheaper rates, he is forcing the Government to stop ripping us off via "their" banks. The nationalised banks' return to profit will take longer - thus undermining Gordon Browns claims of a great return.
Vince also knows that this won't drive a property boom since there is a difference between making money available, and wanting to take it when you face unemployment, fear of paying too much, everything else in the economy.
Vince is on our side
8. refusetobuy said...
OIS (Overnight Index Swap) is the reference rate of choice nowadays since it contains (practically no) credit risk. Libor is being driven by this market.
9. flashman said...
Refusetobuy: These days the OIS is more useful than the LIBOR but it tells us very little compared to the OIS LIBOR spread which measures risk/liquidity in the money markets. The OIS cant tell us how the banks perceive the creditworthiness of other banks but the OIS LIBOR spread, on the other hand, tells us quite a lot
10. refusetobuy said...
Better to look at CDS's or bank equity prices for credit worthiness. Libor gives an approximation, but is becoming less and less relevant. It is losing volume to the OIS market so doesn't capture liquidity properly either.
11. flashman said...
refusetobuy: I think you misunderstand my post. I am not choosing Libor over the OIS or vice versa. It is the spread that is useful. I am referencing liquidity/risk in the money markets and its relevance to mortgage lending. It’s one of the main measures that the FED and the BOE use to gauge what is going on. The narrowing of the spread suggests more liquidity and less risk and hence more mortgage/general lending
Bank equity prices would be a rather unsuccessful and unorthodox gauge of liquidity/risk in the money markets. As you know bank shares can soar up and down for any number of reasons
12. refusetobuy said...
I'm saying that the spread is becoming less relevant, because the market of products tied to Libor is becoming smaller.
What banks quote for Libor is becoming less relevant because they don't lend or borrow at Libor.
There are better/more relevant indicators.
13. flashman said...
Refusetobuy: I think we might be talking at cross-purposes. I absolutely agree that the LIBOR is not nearly as relevant as it was, for the reason I outlined in my first post.
But…perversely it is still useful, as part of a spread equation with OIS because the OIS gives it back some of the meaning it has lost. This is why the BOE/FED still hold great store in the LIBOR-OIS spread (not the LIBOR or the OIS alone).
Like I said before, OIS and LIBOR are not much use on their own because: - With OIS transactions the counterparty exposure is limited to the difference between the fixed and floating rates being swapped. There is no exchange of principal because only the spread between the fixed and floating rates is exchanged so in a way the counterparty risk is negligible. With LIBOR, there is way more counterparty risk because the lending bank can lose the principal and the interest when there is a default. The difference between LIBOR and OIS thus reflects the amount of counterparty risk in LIBOR. This is they are not much good on their own but together they mean something (admittedly the spread tells us more about risk than liquidity but that’s another story
14. refusetobuy said...
Just trying to point out "The difference between LIBOR and OIS thus reflects the amount of counterparty risk in LIBOR." is becoming less and less true. 2 years from now (when current swaps expire) Libor will become useless as the market moves to a different reference statistic.
15. flashman said...
refusetobuy: quite possibly, but for now, as you say, it is the reference statistic
16. refusetobuy said...
Bank lending is better approximated by OIS and a CDS than by Libor. Any bank writing with respect to libor is opening themselves up to being arb'd
17. refusetobuy said...
Good chatting with you Flashman
18. flashman said...
refusetobuy: yes, LIBOR isn't much cop. The LIBOR OIS spread, however ARRRRRRG!
I do reference CDS spreads but pricing off CDS spreads is a bit outré at the moment, because it relies on the market rather than the fundamentals to price the risk. Unfortunately the market hasn't proved to be very good at it recently and there is a feeling that we should go back to fundamentals. There is also a feeling that widening CDS spreads feed off themselves in a destructive loop thus making them unreliable in times of stress
What do you do, if you don't mind me asking?
19. flashman said...
refusetobuy: There was an article in ft.com. It lamented Libor and criticised the use of CDS.
http://ftalphaville.ft.com/blog/2008/10/30/17633/lamenting-libor/
20. refusetobuy said...
Risk management. I find this site good for spotting clouds (and sometime their silver linings).
21. flashman said...
I know what you mean. I used to read the site because it provided me with a sense of the dark side that is unavailable elsewhere. Now I like using it to pass the time between sports broadcasts. LIBOR OIS and CDS spreads are pointing to zero risk of me doing any work while the TDF and the Ashes are on