Jump to content
House Price Crash Forum
1929crash

Libor Rate Increases

Recommended Posts

The interest rate at which banks lend to each other in dollars, the famous BBA three-month dollar LIBOR rate, has been creeping up day after inexorable day since the end of February.

The cumulative impact has been a doubling of that rate during those 90 odd days, to more than 0.5 per cent yesterday - the highest three-month dollar LIBOR rate for something like 10 months.

What does it all mean?

As you'll probably recall, when LIBOR rose relative to central banks' official funding rates in an almost unbroken sequence from the summer of 2007 till the autumn of 2008 - when Lehman collapsed - the causes were sinister.

It was the most visible manifestation of perhaps the worst liquidity crisis the world's big banks had ever experienced.

There is however a more benign explanation.

The thrust of anticipated bank reforms - whether they're the Obama reforms or the increases in capital and liquidity ratios to be demanded of banks by the Basel Committee on Banking Supervision - are likely to have the effect of increasing the costs for banks of lending.

And if the costs for banks of lending were to rise, that would mean that banks themselves would have to pay more for their credit, along with the rest of us (ouch). Hey presto, three-month dollar Libor rises in a semi-permanent way.

As it happens, there is one more explanation of the LIBOR rise: that disunited regulators, central bankers and government heads are largely united by a single reforming ambition, which is to put in place new legal structures for big banks that would allow them to fail without crippling the economy.

Here's the paradox. If big banks can be allowed to fail, if they could no longer be certain that they'd be bailed out by taxpayers in a crisis, the risks of lending to them rise.

So in sanitising the banks, in turning them from weapons of mass destruction into more conventional businesses that can be permitted to go bust, they become less attractive to creditors, who would obviously demand a higher LIBOR interest rate.

http://www.bbc.co.uk/blogs/thereporters/robertpeston/

What do HPCers think? Cause for concern or no big deal?

Share this post


Link to post
Share on other sites

If you had not posted it I would have been oblvious to it - what does Preston think?

Peston's thoughts are in the OP.

Is it warm in Swansea today? B)

Share this post


Link to post
Share on other sites

I don't think that the SLS ends until 2012 (or perhaps 2011),

Peter.

I _think_ the BoE is not buying any new assets, so in that (admittedly wrong) sense it's ended.

They have to pay back the outstanding assets by 2012, but the banks aren't taking on lending while that goes on. Hence they'll not lend to one another, preferring to clear their own debts with the BoE first to prevent a more pressing need for funds later.

People with cash are being suckered by the BoE and banks into giving them their money through low interest rates and mortgages with low LTV to improve their balance sheets. This is having a virtuous circle effect on house prices, convincing everyone that the market value of property has been protected. Presumably when the stimulus stops the banks can then repossess with impunity, and the government can borrow money cheaply.

Meanwhile, those saving against the base rate are getting screwed.

Share this post


Link to post
Share on other sites

My thoughts the basel restrictions caused the credit crunch in the first place. Banks rushed for capital due to a tightening that was required just before the credit crunch happened and the rest is history

Share this post


Link to post
Share on other sites

I _think_ the BoE is not buying any new assets, so in that (admittedly wrong) sense it's ended.

They have to pay back the outstanding assets by 2012, but the banks aren't taking on lending while that goes on. Hence they'll not lend to one another, preferring to clear their own debts with the BoE first to prevent a more pressing need for funds later.

People with cash are being suckered by the BoE and banks into giving them their money through low interest rates and mortgages with low LTV to improve their balance sheets. This is having a virtuous circle effect on house prices, convincing everyone that the market value of property has been protected. Presumably when the stimulus stops the banks can then repossess with impunity, and the government can borrow money cheaply.

Meanwhile, those saving against the base rate are getting screwed.

Here's how Pesto reported it:

In other words, there is an acute risk of mortgages becoming either scarce or very expensive or both, if the government were to insist that taxpayers get their £300bn back in 2012 or so. And that in turn would almost certainly prompt a further housing-market dip.

But what if the government were to extend the £300bn of support? That too would be dangerous, because it would risk seeing the £300bn of bank succour classified (either formally or in the eye of investors) as part of our national debt, at a time when public-sector borrowing is rising far too fast.

And adding a further £300bn to the national debt would further undermine the confidence of those who lend to the government, at a time when their confidence is a little bit too fragile for comfort.

I must admit that I had thought the FSA said there was no way out. If you force the banks to pay back, they go down (so they have to be bailed out, so the whole exercise is pointless with the "bonus" of causing chaos in the money markets). If you don't, our national debt increases by 20 - 30% overnight, and we're in PIIGS territory.

Who knows what little wheeze they're planning to get us out of this one. I've written to my MP (Cons) to ask, but so far, not a dickie bird (not that I'm expecting anything other than an anodyne reply),

Peter.

Share this post


Link to post
Share on other sites

I must admit that I had thought the FSA said there was no way out. If you force the banks to pay back, they go down (so they have to be bailed out, so the whole exercise is pointless with the "bonus" of causing chaos in the money markets). If you don't, our national debt increases by 20 - 30% overnight, and we're in PIIGS territory.

Who knows what little wheeze they're planning to get us out of this one.

That £300bn is around 40% of the entire UK GDP. I can't see the banks coming up with external funding for that when they are offering mortgages as low as 2.5%.

I think there is an interest rate mismatch due to the MPC base rate being forced down. The MPC base rate used to follow the market, not lead it. That changed post-20007 and I think that has upset the funding sources (let alone their losses due to MBS rating fraud). The borrowers are still getting base-rate related deals but external investors are not prepared to supply funding at that rate.

I wonder what the mortgage rates would be if goverment distoration was removed. Since UK govt debt is apporox 4% for 10-yrs, I would guess at 5.5% to 6% for a variable rate 25-year mortgage for a perfect credit history and good deposit, more of course if there is credit risk. Since external investors have been screwed by misrating, the mortgage rate for future funding could be even higher.

So to go all Eric.

Mortgage interest rates are not yet at a clearing level to match foreign savers with UK borrowers.

...and of course, if this were to start matching up, we get our HPC due to a lot of supply coming on the market.

VMR.

P.S. Have you noticed how the house prices indexes have deviated over the last year, Rightmove is getting way ahead of the Haliwide figures. This indicates to me that it is the more cash-rich buyers that are in the market now. They get poor savings rates so are being forced into the housing market.

Share this post


Link to post
Share on other sites

I wonder what the mortgage rates would be if goverment distoration was removed. Since UK govt debt is apporox 4% for 10-yrs, I would guess at 5.5% to 6% for a variable rate 25-year mortgage for a perfect credit history and good deposit, more of course if there is credit risk. Since external investors have been screwed by misrating, the mortgage rate for future funding could be even higher.

At a guess, the UK populace couldn't service such rates (more for less than perfect credit history, etc.). Therefore any investor would require a an extra risk premium, which would push the rate even higher, which could be even less serviced, which...

I can't really see any way out of this mess,

Peter.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 152 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.