Banks’ Reluctance to Lend to Each Other Declines to Two-Week Low

European banks’ reluctance to lend to one another dropped to the lowest in two weeks, according to a money market indicator.

The difference between the forward-rate agreement on the three-month euro interbank offered rate and overnight indexed swaps, known as the FRA/OIS spread, declined to 23.4 basis points at 1:21 p.m. in London, from 24 yesterday, data compiled by Bloomberg show. The gap is the tightest since July 27.

The cost for European banks to borrow in dollars fell to the lowest in more than a year. The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 33 basis points below Euribor, the cheapest since July 25, 2011, from 36 yesterday.

The one-year basis swap was 39.5 basis points below Euribor from minus 40 yesterday. A basis point is 0.01 percentage point.

Three-month Euribor, the rate banks say they see each other lending in euros, was set at a record low 0.345 percent from 0.349 percent yesterday. The benchmark, derived from a daily survey of banks for the European Banking Federation, fell for the seventh day.

The London interbank offered rate, or Libor, for three-month dollar loans rose to 0.437 percent from 0.435 percent yesterday. Libor is published by the British Bankers’ Association.

The EBF’s euro overnight indexed average, or Eonia, of unsecured lending deals was set at 11.2 basis points from 11.5 on Aug. 10. The Eonia swap, an estimate of average overnight borrowing costs over the next three months, was at 7.1 basis points from 7 yesterday.

Lenders increased overnight deposits at the ECB yesterday, placing 326 billion euros ($403 billion) with the Frankfurt-based central bank from 311 billion euros on Aug. 10.

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