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It's been a week of mostly positive data points for U.S. investors. Here's another: the Libor-OIS spread has narrowed to a level former U.S. Federal Reserve Chairman Alan Greenspan said he regarded as "normal."The Libor-OIS spread, which measures the reluctance among banks to lend, fell 1 basis point Thursday to 25 basis points -- its lowest level since January 24, 2008, Bloomberg News reported. The spread had surged to an incredible 364 basis point in October 2008, during the global financial crisis' acute stage.
Further, other key financial barometers confirm that the banking sector is normalizing. For example, the TED spread, or the difference between what financial institutions and the U.S. Treasury pay to borrow money for three months, fell below 30 basis points on August 4 for the first time since March 2007; the spread traded at 27 basis points on Thursday. In October 2008, the TED spread hit a high of 464 basis points.
Monetary/Economic Analysis: The credit crisis has ended, but the lending crisis has not: small/medium businesses are still having a tough time obtaining the credit they need for commercial operations. Hence, policy makers must re-double their efforts to free-up this critical source of capital for these companies -- who are the source of many new jobs in the United States. That said, the decline in both the Libor-OIS and the TED spread is a welcome sight, as it indicates banker-to-banker confidence is increasing.
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