EU Banks Jump After Central Banks Cut Rate on Dollar Swaps

Deutsche Bank AG and Barclays Plc led a rally in European bank stocks after the world’s most powerful central banks lowered the cost of emergency dollar funding in response to Europe’s sovereign-debt crisis.

Barclays climbed (BARC) as much as 9.4 percent in London trading, and was 10.7 pence higher at 179.7 pence at 2:26 p.m. local time. Deutsche Bank rose 5.2 percent in Frankfurt, while BNP Paribas SA and Credit Agricole SA gained in Paris. The 46-member Bloomberg Europe Banks and Financial Services Index jumped almost 5 percent.

European banks have had to pay rising costs for dollar funding after U.S. money market funds progressively curbed their lending amid concerns over the region’s debt crisis. Those higher costs have in turn led banks, including BNP Paribas and Societe Generale, to scale back their own lending operations in the U.S. currency, threatening to worsen an economic slowdown.

“This demonstrates that central banks recognize the difficult situation and are willing to act in concert,” said Peter Braendle, who helps manage about $60 billion at Swisscanto Asset Management in Zurich. “The market thinks it’s a great idea -- but for how long is the question.”

Funding Costs

The cost for European banks to fund in dollars rose earlier today to the highest level since October 2008, a month after New York-based Lehman Brothers Holdings Inc. filed for bankruptcy protection. Banks are also more reluctant to lend to one another, driving the Euribor-OIS spread to 98.2 basis points at 9:15 a.m. in London, the widest gap since March 2009 and up from 96.6 basis points yesterday.

The U.S. Federal Reserve and five more central banks agreed to reduce the interest rate on dollar liquidity swap lines, a move designed to make it cheaper for banks to borrow in dollars.

“The central banks are clearly responding to the surge in dollar costs,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “This is good news.”

The central banks lowered the interest rate to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, the Fed said in a statement in Washington. The authorization of the swap arrangements has been extended through Feb. 1, 2013. The Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank are involved in the coordinated action.

“Concerted action by central banks to tackle what has become an increasingly debilitating crisis in the eurozone is a breath of fresh air,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an interview. “This move is in response to the severity of the funding squeeze in the banking sector and is designed to forestall a credit crunch.”

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net;

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