LIBOR and Repo-Rates Follow Agency Spreads Higher: Credit Crisis Far From Over

RGE Monitor: Aug 25, 2008

  • August 25: After agency spreads (=stress lead indicator according to Brunnermeier) and LIBOR-OIS spreads, Ted spread -which is also a measure of financing conditions in repo markets- is back above 114bp. 
  • August 15 McCormick: Extension of central banks’ lending facilities earlier this month fail to ease money market tensions: 3m USD LIBOR-OIS spread widened to 77bp, 3m EUR spread to 64bp. Forward rates signal further stress ahead.
  • BNP August 5: Extension of Fed policy arsenal, incl. TSLF options for quarter-end tensions, reiterates severity and persistence of banks’ stress situation. Banks in U.S., EU and Switzerland bid heavily for 3-month funds at just below LIBOR. Questions arise again if LIBOR is actually too low as there’s barely a difference between secured and unsecured lending rates.
  • July 31, Reuters: Banks borrowed a record amount of funds from the Federal Reserve in July, while the commercial paper market continued to contract; ECB lent record $49bn Euro to Spanish banks.
  • Sarkar/Wang/McAndrews (NY Fed), July: The empirical results suggest that the TAF has helped to ease strains in intebank market.
  • Dudley (NY Fed Vice): Balance sheet constraints due to reintermediation and deleveraging are the main culprits rather than outright counterparty risk or less term funding provided by money market funds.
  • Taylor/Williams: LIBOR-OIS spread is driven by increased counterparty risk between banks –> no empirical evidence that the TAF has reduced spreads. As unsecured loans to companies and households are priced off LIBOR, the hike in interbank spreads interferes with monetary policy and the real economy.
  • Giavazzi, Caballero (Vox): hypotheses for persistently high interbank spreads includes possibility that banks aren’t lending in order to bankrupt acquisition targets.

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