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Funding Crisis is Over But Not The Credit Crunch
Key measures of global funding costs have been on a steady decline since November last year following the blowout in costs associated with the collapse of Lehman Brothers. The main indicator, The London Interbank Offered rate (LIBOR), which is used to set the borrowing rate between banks is back around 0.8% after reaching a peak of 4.82% in October. The policies implemented worldwide including the US Treasury “stress testing” of US Banks has provided the market with confidence that the worst is over and that financial institutions will survive. There are other measures such as the LIBOR-OIS Spread and the TED Spread which in laymans terms simply measure investors willingness to accept risk have all been in retreat as this confidence has come back.
So if the funding costs are now being reduced for Banks why are our interest rates going up?
Banks have been accused of not passing on these reductions and as a consequence this will improve their own profit margins. It is thought they are doing this to protect themselves from increases in losses from bad debts as the economy slows. The banks will be generating greater profits as a result of the margin expansion, in a time when their competition has been greatly reduced, which in turn will give them more capital making the a safer “financial” proposition. In short as we have been saying over the last 12-18 months the Australian banks are going to be big winners as a result of the credit crisis.
So the funding crisis is over, but until the banks start lending money to businesses and individuals on reasonable terms the credit crunch is not yet over.
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