Libor Conspicuously Stable After Brexit Panic Roils Markets

  • Sterling, euro rates barely moved after surprise U.K. decision
  • Central banks keeping rates depressed with excess liquidity

Amid the carnage in financial markets that followed Britain’s shock decision to quit the European Union, one gauge of market stress remained conspicuously stable: the London interbank offered rate.

In the days that followed last week’s historic vote, one-week sterling Libor, a measure of how much it costs banks to borrow from one another, actually fell 1 basis point, or 1 one-hundredth of a percent. That compared with a gut-wrenching 11 percent drop in the British pound and the Stoxx Europe 600 Index, while the Markit iTraxx Financial Index of credit-default swaps on the senior debt of 30 banks and insurers surged the most in at least five years.

Libor hasn’t shifted much because central banks around the world have been flooding the financial system with cheap liquidity for years and have well-worn playbooks for dealing with potential shocks such as Brexit to ensure that bank funding doesn’t dry up. In the eight years since the collapse of Lehman Brothers Holdings Inc. plunged the global economy into the worst recession in living memory, policy makers have forced lenders to hold hundreds of billions of dollars of additional capital and high-quality liquid assets to tide them over unexpected market dislocations.

“Markets didn’t freeze,” said European Central Bank Vice-President Vitor Constancio. “What I see in the markets is totally different from what we saw after Lehman.”

Past Lowballing

After some European banks were found to have routinely lowballed their Libor submissions to avoid the perception that they were struggling to fund themselves before and during the 2008 financial crisis, changes to how the measure is set means banks’ individual contributions are no longer publicly available. The aim was to remove much of the motivation for reporting artificially low numbers.

Central banks moved more quickly to limit any panic this time around. As the pound plunged to a three-decade low after the vote Friday morning, Bank of England Governor Mark Carney issued a statement pledging to provide an extra 250 billion pounds ($333 billion) for the financial system. 

“Quite different than what we may have seen in previous financial crises is the coordination between large banks and financial regulators,” said Barclays Plc Chief Executive Officer Jes Staley said in a Bloomberg Television interview. “We were on the phone very actively with the Bank of England, the PRA, the FCA, the New York Fed, et cetera. There’s a recognition that to avoid the next financial crisis, banks and the regulators have to be collaborative.”

The three-month FRA/OIS spread -- a gauge of where banks’ borrowing costs will be in the months ahead -- briefly spiked to the highest since 2012. Still, it was a fraction of the levels hit in 2008. After Lehman declared bankruptcy, one-week sterling Libor rose 141 basis points over the next two days as banks struggled to fund themselves.

Liquidity Auctions

Even before last week’s decision, the Bank of England had held two extra liquidity auctions to make sure banks had sufficient funding to tide them over. Amid squabbling over who should be top of both the U.K.’s two main political parties since the vote, Carney has stepped into the leadership vacuum pledging live on television -- twice -- to support the banks and take any measures needed to bolster the economy.

“It would be irresponsible of me or any of my other colleagues to walk away from those obligations,” he said. “Because those are our obligations under statute.”

His counterparts around the world reacted with a mix of promises and action. The European Central Bank and the Bank of Japan issued statements stressing the availability of liquidity to keep the banking system running if needed. The Swiss National Bank intervened on Friday to prevent a surge in the franc.

(An earlier version of the story corrected the job title in the fourth paragraph.)

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