For borrowing, banks are charging each other a 77-basis-point premium above what traders predict the U.S Federal Reserve's daily, effective Federal Funds rate will average over the next three months, up from 24 basis points in January, Bloomberg News reported.
Banks concerned about potential write-offs, global slowdown
Economist Peter Dawson said Monday two factors are driving the widening short-term lending spread.
"Rightly or mistakenly, there's a suspicion that selected banks will announce another round of write-offs," Dawson said. "Second, banks are coming to grips with the reality of the global slowdown. The slowdown suggests reduced revenue for banks, which would further hurt already strained balance sheets, and make banks more-reluctant to lend."
In August 2007, banks began to hoard cash and pare-back lending after subprime mortgage defaults forced two Bear Stearns hedge funds to seek bankruptcy protection. A series of regional, mortgage asset-related write-offs followed, as the housing boom ended, first in the United States, then in the United Kingdom. Mortgage-related credit losses now total more than $500 billion worldwide, Dawson said.
Further, Dawson said the lending climate will improve "only after banks become confident in those they are lending to. So long as banks believe some in their sector may be hiding losses, the bias will be toward pulling back lending activity, and that's reflected in higher rates," Dawson said, adding that it's difficult to predict when the tighter lending conditions will end.
Economic Analysis: Restrictive lending will also make it harder for the U.S. economy to expand and accelerate from its slow growth / no growth status, and will also hurt a recovery in the U.K. Moreover, the credit hurdle, combined with reduced disposable income due to high energy prices, takes a considerable amount of stimulus out the system, something policy makers will need to pay attention to, if the economic slump worsens.
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Reader Comments (Page 1 of 1)
8-25-2008 @ 11:36AM
william lindblad said...
Good post, but it is at least 3 months behind the times. This started near a year ago with the near fall of Northern Rock and the few others that did go. Remember when Paulson and Citi put their heads together and tried to come up with a bank super fund? That's months ago. Bernanke's trip to meet with Jean Claude and the other EU bankers is well past tense also. All of the U.S. domestic banking has been wary of each other since March, regardless of what the Fed said and did. Trichet is a survivor of many accusations, including being a die hard hawk, but this time keeping rates up may have been a blessing. Mortgage problems prevail on the other side of the pond and Europe too.
8-25-2008 @ 12:14PM
Lee Cruz said...
If you look at the schiller index and do the math on the housing bubble, you can expect at the very least a 1.3 Trillion Dollar bail out. It's very likely that you'll see it actually exceed 2.5 Trillion dollars as the market corrects the bubble. The Fed is going to have to inflate the currency to greater heights and Ben Bernanke will need better security to make it home every night. The bad news is that this bail out will actually lead to banks insolvency. By printing up money to prevent banks from deleveraging their assets, you're encouraging banks to keep the risky assets. By failing to correct, their leverage numbers go up instead of down and their insolvency increases exponentially. If they were to sell off the bad assets they would improve their liquidity through real wealth and not through credit made out of thin air. It's not money that creates credit, it's the final goods and services that create the ability to loan and borrow.