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ElPapasito

Banks Won't Lend To Each Other?

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This question has been bothering me since the credit crunch kicked off. They say LIBOR is higher than the bank base rate because banks are frightened to lend to each other. Lending is down therefore in the wider economy. Hang on a minute. So if bank A won't lend to bank B doesn't bank A just lend its money to Joe Public anyway?

Isn't the issue that the banks have spunked all their capital away on bad lending. Bank A doesn't have anything left to lend bank B. LIBOR is high because net worth is just about zip all over the place so supply is below demand so the price of money has risen?

Right or wrong?

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This question has been bothering me since the credit crunch kicked off. They say LIBOR is higher than the bank base rate because banks are frightened to lend to each other. Lending is down therefore in the wider economy. Hang on a minute. So if bank A won't lend to bank B doesn't bank A just lend its money to Joe Public anyway?

Isn't the issue that the banks have spunked all their capital away on bad lending. Bank A doesn't have anything left to lend bank B. LIBOR is high because net worth is just about zip all over the place so supply is below demand so the price of money has risen?

Right or wrong?

It actually means they aren't selling securitised debt to each other, which the banks would then sell on to lenders. It was all paper money that didn't really exist until some mug hedge-fund manager 'purchased' it on the basis it would earn money.

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LIBOR is high because net worth is just about zip all over the place so supply is below demand so the price of money has risen?

Right or wrong?

So how was the pub tonight?

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This question has been bothering me since the credit crunch kicked off. They say LIBOR is higher than the bank base rate because banks are frightened to lend to each other. Lending is down therefore in the wider economy. Hang on a minute. So if bank A won't lend to bank B doesn't bank A just lend its money to Joe Public anyway?

Isn't the issue that the banks have spunked all their capital away on bad lending. Bank A doesn't have anything left to lend bank B. LIBOR is high because net worth is just about zip all over the place so supply is below demand so the price of money has risen?

Right or wrong?

Wrongish. What is bad about banks not lending to each other is related to liquidity. If a bank can't rely on the interbank market to borrow short term as and when it might need to, it means it needs to keep more reserves, and so has to be more careful about how much it lends.

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Guest sillybear2
Isn't the issue that the banks have spunked all their capital away on bad lending. Bank A doesn't have anything left to lend bank B. LIBOR is high because net worth is just about zip all over the place so supply is below demand so the price of money has risen?

It's the elephant in the room version of the prisoners dilemma, Bank A knows it's sitting on shit paper and is effectively insolvent but dare not admit it, so it knows Bank B will also be sitting on similar amounts, if not more, of the same paper so they wont lend to them because they know they could go down at any minute. LIBOR and the CDS market is now reflecting that increased risk premium, plus the fact banks aren't exactly awash with liquidity to lend out, they need all the funds they can get to take their undercapitalised SIV's back on the books.

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Guest sillybear2
Wrongish. What is bad about banks not lending to each other is related to liquidity. If a bank can't rely on the interbank market to borrow short term as and when it might need to, it means it needs to keep more reserves, and so has to be more careful about how much it lends.

It has long gone past a question of liquidity though, we're now talking about a solvency crisis. Hence the reason why the BoE's pushing on a string in terms of liquidity makes absolutely no difference.

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Pass the parcel stopped and the banks actually had to lend what they had in deposits.

http://en.wikipedia.org/wiki/Basel_II

Basically playing pass the parcel got them around all the Basel capital requirements as the money lent out was no longer on "their books" so didn't count as loans.

Lets Say Bank A can lend out 90% of deposits but must keep 10% behind as capital, if the housing boom lending out 90% was easy with overinflated prices. This gives bank A a problem how can it lend out more money, get more deposits slow plus you will get some churn with people removing money.

Far better if you can devise some clever way to get the money off your accounts so the banks invented the credit markets where they told the regulators they no longer owned the debt as they had sold the risk on, hey presto now the bank can lend 90% of deposits again.

This is a great game and relies totally on the fact house prices don't go down and people keep paying their mortgages. It was a system based on the asset price explosion, because if the mortgage holder didn't keep paying the bank could seize the asset and sell it and get it's money back.

This system has collapsed now because houses aren't going up in value, they are dropping like a stone and people are finding it harder to pay the mortgage and defaulting. Now the bank comes for the house it probably won't cover the loan they make a loss and the people they sold the debt too want all their money back.

All the banks know this and they system has halted. Anyone who's saying this mess is going to get resolved sharpish say in the next 1-2 years I think is seriously deluded. 5-10 years would be an optimistic timescale but you can bet the banks won't get to play this game again if there are any banks left.

As Mervyn King himself once said: “House prices are a matter of opinion whereas debt is real.”

However the Banks took the opinion that house prices where real and debt was merely a position on the balance sheet.

It was a huge pyramid scheme that should have been stopped by the regulators years ago, but wasn't because it made profit and everyone had their snouts in the trough. Remember our shopping binge has brought in record tax receipts for the govt, and the govt liked that a LOT.

All pyramids collapse under there own weight because the business model is complete folly and always gets exposed for what it is. This time it's the banks that have done it with our money and now it's going to pop.

Christ knows what's going to happen now, we are in uncertain times because never in human history have so many people been so stupid all at the same time.

This isn't like the 90s, it's not like the 70's and even the great depression of the 30's I think will pale into complete insignificance to the mess created by the worlds banks. Thank god they aren't at the heart of economy otherwise everything would grind to a complete halt.

Edited by interestrateripoff

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Should have added, once the bad loans end up back on the banks books this then starts to affect it's capital position, which means they have no money to lend as they will breach the rules this game of pass the parcel got them around.

The banks have no money to lend, that's why they have stopped. Most people on here know this, the banks know this, the central banks know this, our politicians know this unfortunately the sheeple haven't twigged yet.

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http://www.independent.co.uk/news/business...ers-865925.html

The UK mortgage market, the second largest in the world after the US, has for many years now been highly dependent on funding from international money markets.

Even if Britain's entire stock of retail deposits were devoted to mortgages, they would still be insufficient to fund the gigantic size of the country's mortgage market. The market in mortgage-backed securities has been effectively closed for the best part of a year now, which explains the current mortgage famine and the increasingly severe correction to house prices.

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Another reason is because they're not too sure how bad it's all going to get.

Going on the Halifax numbers, house prices are back to where they were in 2006 and are £20,000

down on August 2007. All those that took out a 90%-95%-100%-125% mortgages are now in

negative equity. The question is how many of these will lose their jobs in the downturn and jump

ship leaving the banks with nothing more than a shedload of bad debts.

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It's not just those, if we have a Japan style house price collapse of around 75% of peak value this would plunge everyone with a LTV of 25% plus into negative equity.

I suspect that the vast majority of British Banks are insolvent because of their own stupidity.

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This question has been bothering me since the credit crunch kicked off. They say LIBOR is higher than the bank base rate because banks are frightened to lend to each other. Lending is down therefore in the wider economy. Hang on a minute. So if bank A won't lend to bank B doesn't bank A just lend its money to Joe Public anyway?

Isn't the issue that the banks have spunked all their capital away on bad lending. Bank A doesn't have anything left to lend bank B. LIBOR is high because net worth is just about zip all over the place so supply is below demand so the price of money has risen?

Right or wrong?

interbank lending creates new money, if the banks stop lending to each other money creation is slowed and the cost of borrowing rises...

Do a search for 'fiat money' in google, otherwise this thread could turn into a what is money thread 9although we havent had a good one in a few months)

and all the other posts above are also correct, fiat, basel 2 changes caused the crunch, the pass the parcel, all banks and money itself being technically insolvant/bankrupt since 1929/when fiat money was created...

Edited by moosetea

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It's a symptom rather than a problem, banks are short on cash (credit), so they hoard it instead. When all institutions do this liquidity dries up, which increases the risk of them failing, so now lenders want to be compensated for that extra risk, hence higher Libor.

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I suspect that the vast majority of British Banks are insolvent because of their own stupidity.

I think it was a case of join in or be bought out. If you look at the aggressive expansion of RBS etc, the smaller banks who didn't do the whole excessive mortgaging thing were swallowed.

The ones that survived without excessive lending are probably the best place just now - their competition bought themselves into deep shit and are collapsing.

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It has long gone past a question of liquidity though, we're now talking about a solvency crisis. Hence the reason why the BoE's pushing on a string in terms of liquidity makes absolutely no difference.

Indeed, but I was only trying to answer the question about poor interbank lending which leads to cash hoarding.

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it means it needs to keep more reserves, and so has to be more careful about how much it lends.

I take it you are talking about the 1:10 or what ever it is they keep with the BoE ?

Was this to be in physical gold or silver then all is fine but today a bank can borrow from a bank in India and then deposit that money at the BoE to continue the scam in much the same way people have been using credit cards to pay deposits on houses.

Our BoE has lost the plot in modern times and it's all but imposible to calculate the true asset value of a bank.

No wonder banks don't trust each other as they all know the game they have been playing themselves.

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It's a vicious circle. All those that did take out a 90%-125% mortgage in the last 2 years are now in

negative equity going by the Halifax. And all those that are trying to buy at the moment are finding

mortgage rates are soaring as well as loan to values most banks now want 25% deposit.

All those that are now in negative equity that fixed 2 years ago are looking at refixing their mortgage

at between 30-40% higher interest rates than they were. Double whammy. Negative equity and

soaring mortgage rates. New buyers. no deposits, soaring mortgage rates and falling house prices.

What a mess. Gordon couldn't have screwed things up better if he'd tried. But as we all know, it's

everyone elses' fault but Labours.

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  • 401 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%



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