Dollar Libor Extends Gain as Risk Concerns Remain

The rate banks say they pay for three-month loans in dollars rose for a second day amid lingering concern about the quality of bonds held by lenders amid the European debt crisis.

The London interbank offered rate, or Libor, for such loans rose to 0.53781 percent today from 0.5375 percent yesterday, according to data from the British Bankers’ Association. It reached 0.53844 percent on May 27, the highest level since July 6, on concern that banks owned too many bonds from Europe’s most indebted nations.

“Libor’s edging higher, and today’s increase is marginal,” said Orlando Green, an interest-rate strategist at Credit Agricole Corporate & Investment Bank in London. “The dollar funding concern for European banks has diminished, but there’s still some underlying concern over the health of the banking sector. There are still some problems in the system.”

Libor has more than doubled this year as the sovereign-debt crisis in Europe heightened concern that bank creditworthiness was deteriorating, making financial firms more wary about lending to potentially risky counterparties.

The European Central Bank said on May 31 that banks will have to write off more loans this year than in 2009 and their ability to sell bonds may be hampered as governments seek to finance fiscal deficits.

Spread Little Changed

The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, was little changed at 30.8 basis points today. That compares with an average of about nine basis points in the first three months of the year. The spread surged to 364 basis points, or 3.64 percentage points, after the collapse of Lehman Brothers Holdings Inc. in September 2008.

The recent increase in the spread was “worrisome,” as it posed “significant risks” to economic recovery, Deutsche Bank AG analysts including New York-based Torsten Slok wrote in an e-mailed report dated June 2.

“The widening reflects the reduced willingness of banks to lend to one another, because of growing uncertainty about the degree of their exposure to sovereign and real-estate related debt in the euro-area periphery,” they wrote. “It’s noteworthy that the three-month Libor-OIS spread three months forward has been running substantially above the spot three-month spread, reflecting expectations the crisis will worsen,” they said.

Bank Deposits

To be sure, though the spread “is approaching levels reached early in the subprime crisis,” it “pales in comparison to the heights reached post-Lehman,” the analysts said.

Banks are depositing cash with the ECB amid investor concern that a 750 billion-euro ($918 billion) European rescue package, announced May 10, may not be enough to contain the fallout from the sovereign-debt crisis.

Overnight deposits with the ECB rose to a record yesterday. Banks lodged 320.4 billion euros in the ECB’s overnight deposit facility at 0.25 percent, compared with 316.4 billion euros the previous day, the central bank said today. That’s the most since the introduction of the euro in 1999. Deposits have exceeded 300 billion euros for the past five days.

Three-month Libor is a benchmark for about $360 trillion of financial products worldwide, ranging from mortgages to student loans. Rates are determined by groups of banks in a daily survey by the BBA before 11 a.m. in London. Members provide estimates on how much it would cost to borrow in 10 currencies for periods ranging from a day to a year.

WestLB AG contributed the highest dollar rate today, at 0.59 percent. Rabobank Groep, JPMorgan Chase & Co., Citigroup Inc. and Bank of America Merrill Lynch gave the lowest, at 0.50 percent. The BBA strips out the four highest and lowest rates received, calculating the average of the middle eight.

The three-month rate for euros, or euro Libor, rose to 0.641 percent today, from 0.638 percent yesterday. The three-month euro interbank offered rate, or Euribor, rose to 0.706 percent from 0.704 percent yesterday, according to the European Banking Federation. That’s the highest level since Dec. 29.