Three-month dollar Libor fell just a bit on Friday, breaking with its unsettling rise over recent days, a trend which may have been related to fears over US financial reform and European sovereign exposure.
Time then for some reflection.
As Credit Suisse analyst D Davies writes, emphasis FT Alphaville’s:
Over the course of this week we have had a number of inquiries about European banks’ dollar funding; there have also been a number of news stories suggesting that some banks have been unable to roll over commercial paper. Overall, we think that the attention paid to US$ funding this week has been excessive.
First, the CS analyst says, it’s true that European banks like BBVA won’t be tapping much from US commercial paper markets, on account of new SEC rules impeding money funds from holding three-month paper. But this is avoiding inconvenient funding — not a loss of access altogether.
Which may be true, but figures from the WSJ on Friday show that quite a bit of funding is about to get expensive in any case:
Moody’s Investors Service estimates that almost a third of the top funds’ $2 trillion in assets were held at the end of last year with just 16 European banks. Analysts at Bank of America estimate that 40% of prime money funds’ holdings are in European banks. The Moody’s figures show BNP Paribas, which needs dollars for a lot of its trading activities, had roughly $70 billion in funding from U.S. money funds at the end of 2009. That would be equivalent to roughly 2.8% of BNP’s year-end total liabilities. Another French bank, Société Générale, has about $59 billion from U.S. funds, which would represent about 4.8% of its total liabilities as of Dec. 31.
Plus, other new rules for money funds leave questions over US banks’ own access to repo markets. So it’s not just doubts over European institutions.
Still, Credit Suisse say, there’s been a bit of Libor counting confusion:
Differences in LIBOR funding rates between banks, while large if expressed in percentage terms, actually reflect quite small differences in basis points. If one bank is paying 0.48% for 3 month money and one bank is paying 0.6% (as was the case in yesterday’s 3m dollar LIBOR fixing) then it is not correct to express this as a “25% difference” rather than a 12bp difference (or even more accurately, given that there is always a highest and lowest rate on the LIBOR panel, a spread 6bp either side of a 54bp mean). The concept of a basis point was invented specifically because it is usually misleading to take percentage differences of interest rates (which are already themselves expressed as percentages).
Useful to remember. Bloomberg reported on Friday that RBS faced a 25 per cent difference in funding compared with the banks quoting the lowest rates. Vulnerability to changes in Libor also depends how much banks need interbank financing in the post-2008 area, Credit Suisse adds.
And in the last resort, there are the central banks to help in a crisis:
Even in the event of a very serious funding market disruption (which we reiterate, has not happened), the central banks have the capacity to expand their provision of US$ liquidity to the European market by more than fifty times – we would note that given balance sheet reductions over the last eighteen months, this amount of liquidity would be a much greater proportion of total requirements than it was in 2008.
Quite. BBVA is understood to have tapped ECB liquidity, the FT reports.
Barclays Capital’s European Credit Alpha note struck a similar note on Friday:
Libor is likely to rise further but remain a funding strain rather than a crisis. Rising FRA/OIS spreads reflect a re-assessment of counterparty credit risks in light of sovereign concerns, as well as strong demand from European banks for dollar funding. The concentration of strains in dollar but not euros or sterling suggests that supply/demand for funding is more important than credit risk. Our money market strategists believe that Libor is set to rise but that ECB/Fed dollar swap facilities establish an upper bound on USD Libor at 1.25%. European banks are not repatriating dollars from US-based branches and are not drawing down reserves at the Fed, suggesting that dollar funding is not yet seriously strained. In our view, suggestions that BBVA has been locked out of commercial paper markets are not accurate.
How I Learned To Stop Worrying And Love The New Normal, in short.
That said, here’s something else to think about: what if the background to the Libor rise has also been that central bank liquidity has been too expensive compared to market alternatives? And what happened to those famed exit strategies?
Something to keep an eye on.
Related links:
Cosmic European commercial paper – FT Alphaville
Eurozone banks sip at ECB’s dollar swap facility – FT Alphaville
‘Heightened levels of interbank funding could be with us for some time’ – FT Alphaville