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Rules Of Lending ‘go Out Of The Window’ As Libor Plunges

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http://business.timesonline.co.uk/tol/busi...icle6809970.ece

Businesses and consumers continued to repay debt last month, despite credit conditions in the markets easing towards an all-time low.

The three-month sterling London interbank offered rate (Libor), the rate at which banks lend to each other, dropped to a low of 0.81063 per cent yesterday — yet, as it did so, it had no effect on overdraft rates, which remained at record highs, and the cost of the average five-year mortgage edged up to nearly 6 per cent.

Michelle Slade, of Moneyfacts.co.uk, the financial website, said: “Normal rules where lenders pass or decrease rates based on the cost of funding seem to have well and truly gone out of the window. Borrowers looking for a new mortgage deal are continuing to pay a heavy price for previous mistakes made by lenders.â€

Latest figures released by the British Bankers’ Association (BBA) showed that businesses repaid £4.1 billion more than they borrowed in July, up from £300 million in June.

Net lending to homeowners by banks increased at the weakest pace in nine years last month, while the value of outstanding loans and overdrafts fell at a record rate.

Nevertheless, David Dooks, director of statistics at the BBA, said: “It’s not true to say that banks are not lending. If a company’s trading volumes are down, it will find it harder to gain finance from lenders because a sustainable business plan isn’t there any more. We’re not anecdotally aware of sustainable business propositions being turned down.â€

How can volumes be down if the recovery is here, surely forward orders will be up meaning business plans are now sustainable?

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Banks are being told to borrow money from retail customers, not the wholesale markets, so the LIBOR rate isn't that relevant. What is relevant is how much interest they are paying on deposit accounts, and that is increasing.

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Banks are being told to borrow money from retail customers, not the wholesale markets, so the LIBOR rate isn't that relevant. What is relevant is how much interest they are paying on deposit accounts, and that is increasing.

Almost like a little competition is returning to the High Street for depositors funds?

About time too!!!!

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My guess is Libor is down because banks dont need money from each other short term...Its summer, offices and shops are slow.

wait till people are back from the holidays...turnovers will go up, cash flow will be pressured and places will overtrade and bust..

and bankers demanding business plans? be nice if THEY had one.

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Banks are being told to borrow money from retail customers, not the wholesale markets, so the LIBOR rate isn't that relevant. What is relevant is how much interest they are paying on deposit accounts, and that is increasing.

Where else could the retail customers' money be, if not already in the banking system?

Cash under the mattress aside, all money is always on deposit in someone's bank account.

Sure, the commercial banks compete to attract depositors, in general motivated because they pay them less than LIBOR, but it is guarenteed that one of them will win.

Inter-bank competition reminds me of professional wrestling - mainly a show for the punters put on by a cartel/closed shop.

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Where else could the retail customers' money be, if not already in the banking system?

Cash under the mattress aside, all money is always on deposit in someone's bank account.

Sure, the commercial banks compete to attract depositors, in general motivated because they pay them less than LIBOR, but it is guarenteed that one of them will win.

Inter-bank competition reminds me of professional wrestling - mainly a show for the punters put on by a cartel/closed shop.

If Abbey persuade me to move my money to them from Halifax, that means Abbey gets to lend the money out at a profit rather than Halifax. That's why they are fighting for our business.

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If Abbey persuade me to move my money to them from Halifax, that means Abbey gets to lend the money out at a profit rather than Halifax. That's why they are fighting for our business.

Each bank is limited in what it can lend, that is by how much it can expand its balance sheet, by its Capital Adequacy Ratio under Basel 2 regulations, not directly by the aggregate of the deposits on its books.

The difference made if I “move my money†from BankA to BankB is that BankA now has to pay LIBOR to another bank to balance its books, whereas BankB pays the depositor the going rate, and its liabilities borrowed at LIBOR decrease by the size of the deposit, all else being equal.

If this going rate is less than LIBOR, then BankB gains. Attracting depositors’ money is usually more to do with the profitability of the balance sheet than with its size.

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Libor is going lower because the entire financial system is awash with free money and because every bank has access to almost inifinite amounts of cheap cash from the global central banks. So why charge high rates to lend cash for three months? Many investment banks are now debating the very real possibility of Libor going to 0 and what implications this has for the markets.

In Sweden if you want to deposit cash with the Riksbank (central bank) you have to pay them 0.25% (they have negative deposit interest rates). So Swedish Libor can easily go to 0, or even negative hypothetically, although this would have serious implications for the global financial system. In Japan, Libors went to 0, and went negative through the basis swap.

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Each bank is limited in what it can lend, that is by how much it can expand its balance sheet, by its Capital Adequacy Ratio under Basel 2 regulations, not directly by the aggregate of the deposits on its books.

The difference made if I “move my money†from BankA to BankB is that BankA now has to pay LIBOR to another bank to balance its books, whereas BankB pays the depositor the going rate, and its liabilities borrowed at LIBOR decrease by the size of the deposit, all else being equal.

If this going rate is less than LIBOR, then BankB gains. Attracting depositors’ money is usually more to do with the profitability of the balance sheet than with its size.

Basel 2 regulations affect how much the bank is allowed to borrow. It must have a certain amount of capital to support the borrowings either from retail customers or wholesale borrowings from other banks.

How much money a bank can lend depends on how much money it has, except that if it lends on more risky loans, then the capital adequacy ratio required by Basel 2 will increase.

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Basel 2 regulations affect how much the bank is allowed to borrow. It must have a certain amount of capital to support the borrowings either from retail customers or wholesale borrowings from other banks.

How much money a bank can lend depends on how much money it has, except that if it lends on more risky loans, then the capital adequacy ratio required by Basel 2 will increase.

Expansion and contraction of the banks' balance sheets is the game, and it is limited by Basel.

From the banks' collective point of view, the money deposited and the money lent come into and go out of existence together, they are two inseparable sides of the same process. Balance sheets of individual banks are reconciled at the end of each business day.

There is no causal or temporal arrow from the depositing to the lending, though that is a convenient fiction which helps to maintain overall confidence in the system.

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