Banks have all but stopped lending to each other, driving transactions in the interbank market to the lowest level since August 1994 and undermining the validity of the suite of interest rates known as Libor.
The CHART OF THE DAY shows loans between U.S. commercial banks have slumped to $153 billion from a peak of $494 billion in September 2008, the month that Lehman Brothers Holdings Inc. filed for bankruptcy protection. The London interbank offered rate is used to set interest charges on $360 trillion of financial products worldwide, according to the Bank for International Settlements.
“The interbank market died with Lehman Brothers,” said David Keeble, head of fixed-income strategy at Credit Agricole Corporate and Investment Bank in London. “Libor is a strange beast, because the market that it’s based upon barely exists. It’s going to take a couple more years to recover, and even then will never regain its former glory.”
Loans between banks have evaporated after central banks around the world pumped cash into the banking system by lending money in exchange for debt securities following at least $1.8 trillion of writedowns and losses by financial institutions as of May 18. U.S. commercial banks turned to the Federal Reserve for short-term borrowing after Lehman’s bankruptcy led to a collapse in trust amongst financial institutions, and the Fed opened its discount window to banks.
“There’s a lot more certificates of deposit that get issued instead of interbank lending, because they’re eligible if you want to turn them into cash more quickly,” said Keeble. “The whole structure has changed.”
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