We were a touch sceptical when this theory of festive stockpiling of cash emerged in the latter part of November.
Libor has since continued its ascent, hitting nine-year highs as banks supposedly seek funds to cover their commitments over the constrained New Year period.
OK, there’s the odd bump in the chart around the turn of previous years where libor has hiccuped – but this year’s move is of another magnitude entirely.
And for those optimists that are arguing that the spike in interbank lending rates is primarily down to end of year worries, the FSA has something to tell you.
It’s not likely to get better any time soon.
Clive Briault, the FSA retail managing director, has warned the CML’s annual conference that, “there is a very real prospect that conditions will worsen further into next year, in terms of both liquidity and credit risks.”
The message from the FSA seems unremittingly grim. Consumers, whose plans are predicated on cheap and abundant credit, will be squeezed as banks tighten their grip, and that impact will be heightened by the slowdown in the housing market as, prices fall – or at least increase by less than borrowers hoped. Against a worsening macroeconomic backdrop, over-stretched borrowers will hit trouble.
Briault admits that when he spoke to the CML back in April, he “under-emphasised the importance of liquidity risks.” But now, faced with a worsening outlook,
Firms should therefore be assessing their funding and liquidity positions; undertaking robust stress testing to reflect current and prospective market conditions; reviewing and assessing their medium and longer term strategies and the options open to them; and considering contingency plans against the worst outcomes.
Easy for you to say, those in the audience might respond. They’re running out of options funding wise.
To ask that tougher stress tests include, “what position you would be in if you had no – or only limited – access to wholesale funding for a sustained period, and to reflect the mobility of some types of retail deposit,” is just a bit tardy. That horse hasn’t just bolted. It’s collapsed. It’s one stop from the glue factory, being propped up with £25bn of BoE money and may yet be nationalised.
And wait for it. Contingency plans for the worst of the worst – an upsurge in retail deposit withdrawals for example, the need for emergency funding, or a “corporate solution through raising new capital or seeking a new owner” – should not under any circumstances be devised on the hoof.
Any such plans need to be considered well before you are engulfed by a crisis since by then it will almost certainly be too late to develop practical responses.