You can't doctor borrowing costs any more.

Photographer: Adam Berry/Getty Images

Deutsche Bank's Woes Show Up in the Money Markets

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Deutsche Bank is in trouble. It’s embroiled in talks with the U.S. Justice Department to negotiate down a $14 billion fine for mortgage-market naughtiness. Its share price has halved in the past year. It was granted special treatment in July’s stress tests, according to the Financial Times. And in the European money market, its funding costs are almost twice as much as those of its peers.

QuickTake Broken Benchmarks

Moreover, one of the bodies responsible for collating money market rates thinks you shouldn’t know what individual banks are paying for their money -- an unforgivable attitude, particularly in light of the lies many banks told (and have been fined for) about interest rates that affect about $350 trillion of securities around the world.  

Deutsche Bank says its short-term borrowing cost is -0.17 percent; the next highest rate among the 20 banks that contributed this week’s levels is -0.28 percent from Portuguese state-owned bank Caixa Geral de Depositos, while the consensus derived from the entire panel is -0.31 percent. Here’s a chart showing what various European banks say the borrowing cost known as Euribor is for three-month euros:  

In Price, Is Knowledge?
Relative interest rates to borrow euros for three months
 
Source: European Money Markets Institute via Bloomberg

Moreover, while the consensus view is that euros are getting ever cheaper as the European Central Bank’s quantitative easing program rolls along, Deutsche Bank’s funding cost has actually risen in recent weeks for the first time in years. (Technically, in this wacky world of negative euro interest rates, it’s hard to talk about “borrowing costs” as such. More precisely, the discount at which Deutsche Bank says it can raise funds has declined. But you get the picture: Even with rates below zero, everyone else can get funds cheaper than the Frankfurt-based firm can.)

A spokesman for Deutsche Bank who declined to be identified said the bulk of the firm’s funding is long term rather than coming from the money markets, as is reflected in Friday’s private sale of $3 billion of bonds repayable in 2021. An investor presentation last month showed that 72 percent of the bank’s balance sheet is funded by “capital markets and equity, retail, transaction banking and wealth management deposits,” compared with just 30 percent in 2007.

Nevertheless, it’s hard to interpret Deutsche Bank saying money is more expensive for it than for its peers as anything other than a reflection of its perceived creditworthiness in the banking community, as opposed to the official assessment by the rating agencies.

Moody’s rates the bank at A3; that’s identical to Spain’s Santander and three steps better than Barclays of the U.K., both of which are reporting cheaper euro borrowing costs than the German bank.

And while Deutsche Bank has been reporting a higher funding cost than the consensus for the past couple of years, the gap has more than doubled from five basis points at the beginning of this year to between 11 and 14 basis points in recent months.

Still, at least the European Money Markets Institute reports what banks are paying for their money on a daily basis. The so-called London interbank offered rates, a rival dataset that includes other currencies as well as the euro, is compiled by an independent body called ICE Benchmark Administration.

Those Libor borrowing rates are available daily as a consensus figure, but only from the individual banks after a three-month delay. That delay was introduced after a review of the suite of rates three years ago in the wake of the various rate-rigging scandals. The administration’s page says that individual bank “submissions were interpreted (often erroneously) as signals of a change in the creditworthiness of a submitter.”  

I take issue with the claim that there was anything erroneous in interpreting banks’ Libor rates as a barometer of their financial health. The problem was that too few institutions were willing to tell the truth about the true state of money-market liquidity during the financial crisis.

What’s worse is that the administration said in March that it plans to draw a veil over what individual banks’ funding costs are:

LIBOR panel banks have expressed concern not only that commercially sensitive data would become public but also that day-on-day volatility in LIBOR rates could lead to false inferences about a bank’s financial stability and credit quality. To address this concern and to maintain transparency as far as possible, IBA will publish individual submissions after three months’ delay, as at present, but on a non-attributed basis.

That’s a regressive step. Increased transparency in financial markets is key to restoring the faith that was undermined by the financial crisis. With rating-agency credibility hammered by the credit crunch, being able to view actual funding costs is an important part of the toolkit for gauging the creditworthiness of financial firms.

Imposing a three-month delay on data is bad enough. Removing the names of the banks attached to each submission is a terrible idea. Being able to see that Deutsche Bank’s funding costs are almost twice what the rest of the market sees is instructive, particularly at this time of heightened stress for the firm. The folks at the ICE Benchmark Administration group should think again about anonymizing indispensable data.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net