Wrong Focus
If one searches for news on LIBOR (=London Interbank Offered Rate, i.e., the rate at which banks lend dollars to each other in the euro-dollar market), they are currently dominated by Deutsche Bank getting slapped with a total fine of $775 million for the part it played in manipulating the benchmark rate in collusion with other banks (fine for one count of wire fraud: US$150 m.; additional shakedown by US Justice Department: US$625 m., the price tag for a deferred prosecution agreement).
Bad, but not deadly for the wobbling banking giant. There is a far more important fact to focus on though – namely what LIBOR has actually done lately. Let us take a look:
Since mid 2015, 3 month LIBOR has soared from a low of approx 22.5 basis points to its current level of 115 basis points – i.e., it is now more than 5 times higher than two years ago. The “ouch” is explained further below – click to enlarge.
The initial surge in LIBOR was due to a combination of the Fed finally hiking rates and new rules for US money market funds taking shape, which were rightly expected to starve European banks of a major source of dollar funding. The latter continued to affect the market throughout 2016, as US MM funds indeed shifted funds from CP issued by European banks to t-bills (this has incidentally also played a major role in boosting domestic US money supply last year).
Along with the surge in LIBOR we have seen a widening in the TED spread (the spread between 3M LIBOR and the t-bill discount rate). Normally this is a sign of increasing stress in the banking system, but we are not sure if that interpretation is currently applicable. The absolute size of the spread is still a far cry from what was seen during past crisis situations. The spread is also well off its 2016 spike high, which we take as an indication that the disruption caused by the retreat of US MM funds from funding European banks is abating.
TED spread: still high, but not as high as it was last year – click to enlarge.
So what is the problem? It is actually not the banking system that gives cause for immediate concern. One must keep in mind that risks in the financial system have shifted since the 2008 crisis. Eventually, these risks are still going to redound on the banking system, but it is so to speak one step removed from the currently ticking time bomb, rather than being right at its center.
The Nature of the Problem
As mentioned above, LIBOR is a benchmark reference rate (which explains why some banks were so eager to manipulate it). The pricing of all kinds of floating-rate debt is tied to it (corporate loans, mortgages, student loans, credit card debt, and assorted derivatives, such as currency and interest rate swaps, etc.). That has now become a problem. Before we …read more
Source:: Acting Man
The post LIBOR Pains appeared first on Junior Mining Analyst.