大象传媒

Bank of England forces bank shrinkage

• Robert Peston
• 16 Oct 08, 04:34 PM

Has the Bank of England lost its power, to re-work Scotty's famous line from Star Trek?

Last week it cut interest rates by 0.5%, in a coordinated attempt with other central banks to re-stimulate the global economy.

Since then, the LIBOR interest rate charged by banks for lending to each other over three months has barely moved.

And that matters, because banks set their prices for credit provided to households and businesses off that so-called interbank rate.

Or to put it another way, banks aren't passing on to us the full cut in the interest rate which the Bank of England thinks is necessary to prevent a deflationary recession.

This may be particularly frustrating for the Bank of England and the Treasury because they've been doing a sterling job, to coin a phrase, of providing loans and financial support to banks, to make up for the credit that's been withdrawn because of the seizing up of wholesale money markets.

As of yesterday, the authorities had committed - since the start of the credit crunch last August - to provide an incremental 拢600bn of taxpayer loans and support to our banks.

Which is just a little bit less than the net dependence of our banks on the defunct wholesale markets.

And our banks are likely to get even more financial help from the Bank of England, thanks to imminent reforms announced today of the way it provides them with loans and liquid assets.

Will this do the trick? Will banks start lending more to us and at reduced interest rates?

That's doubtful - and the Bank of England may well be seen as implicated in the way that banks are reducing how much they lend.

How so?

Well, the Bank of England stressed today that all its additional lending to banks is intended only to see them through this time of stress - and that this financial support should not be seen as a source of longer term funding to the banking system.

So if our poor battered banks don't expect a recovery in wholesale markets any time soon - and it would be foolishly Micawberish of them to count on such a recovery - then they have no option but to reduce what they lend to businesses and to individuals.

Which is why it will be very difficult to turn our super-tanker of an economy away from recession.

• Permalink
• Comments (0)

Spend, spend, spend?

• Robert Peston
• 16 Oct 08, 08:24 AM

It's like an avalanche.

A snowball of tumbling share prices began in Europe yesterday afternoon, picked up momentum on Wall Street - where the important S&P 500 index suffered its biggest loss in 21 years - and has been battering Asia overnight.

And that in spite of the 拢2 trillion pounds of taxpayers' precious money committed by governments to bank rescue plans all over the world.

What's more - and probably more worrying for the authorities - is that interest rates charged by banks for lending to each other for three months remain at disturbingly high levels (see my note from earlier this morning for detail on this).

It means that last week's dramatic and co-ordinated cut in interest rates by central banks is having an only limited impact on the cost of credit for businesses and individuals.

What we're witnessing is the limits of what these banking bail-outs can achieve in the face of what increasingly looks like the onset of a global economic recession.

Governments have been able to prevent individual banks from falling over. There's another example of that this morning with the announcement that to a special new company set up to extract poisonous assets from the huge bank, UBS.

But they've been powerless to prevent the banks contracting the amount of credit they're providing, which has reduced the ability of companies and individuals to invest and spend, and risks turning an economic slowdown into something rather worse.

That's why the British government is being forced to think about something new: a substantial and sustained increase in public spending to offset the contraction of spending by the private sector (there may be little point in cutting taxes, since nervous consumers and businesses would probably hoard any extra cash that went into their pockets).

A rise in public spending would increase the burden of public-sector debt, which is already - on one measure - above the government's self-imposed limit.

And paying off the increased debt would limit the growth of the economy as and when the economy turns.

There's also a risk of downward pressure on sterling and upward pressure on the cost of borrowing for the government, if the UK's balance sheet were perceived to be weak by international standards.

But ministers increasingly believe that may be a price worth paying, if an old-fashioned Keynesian stimulus to the economy meant that the UK suffered a shallow recession rather than a deep and dark one.

• Permalink
• Comments (0)

Banks still not lending

• Robert Peston
• 16 Oct 08, 12:04 AM

Something very strange and worrying is going on in money markets.

First the good news.

The two trillion pounds of taxpayers' money that governments all over the world have put behind the banking system, both in the form of capital injections and guarantees for lending between banks, has reduced the perceived risk of banks going bust.

This reduction in the probability of banking failure is measurable, in that the price for insuring bank debt in the credit-default-swaps market has roughly halved over the past few days.

Here's what you've been expecting: the less good news.

Banks are still not lending to each other at anything like a normal rate of interest relative to official rates.

The statistics (kindly updated for me by Barclays Capital) are extraordinary.

Back in the first half of 2007, before the onset of the credit crunch, the gap between what banks charge each for three-month loans, the three-month sterling LIBOR rate, and the average of expectations of the overnight interest rate for the following three months (the OIS rate), was 0.09 percentage points.

In other words, the three-month lending rate was closely aligned to expectations of what the Bank of England would charge for overnight money.

And that's where the gap stayed for months - until the onset of the credit crunch in August of that year, when the gap widened to 0.23 percentage point, or 23 basis points in bankers' lingo.

Which was wider than normal, but not devastatingly so.

Since then this interest-rate gap, known as the three-month sterling LIBOR-SONIA spread, has risen and fallen as the money-markets have become more or less stressed.

The more stress, the wider the gap or spread.

But the spread never got much above 1 percentage point, or 100 basis points.

Or at least not till September of this year.

Since when the gap has been widening and widening.

Last Friday, the spread reached what was probably an all-time record, of 219 basis points. That was a staggering 2.19 percentage points.

And it's only narrowed a very little since then, to 202 basis points, or 2.02 percentage points.

You may think "so what?"

Well the "what" is big.

It means that banks are only prepared to lend to each other for three months at an interest rate that is a full two percentage points above the rate at which they expect to be able to borrow funds from the Bank of England over those three months.

Which means they just don't want to lend to each other.

And, of course, if they're not prepared to lend to each other for less than 2 percentage points above the expected policy rate, what chance that they'll lend at a keener rate to consumers, households or businesses?

Slim to none, seems a fair bet.

A glance at the chart of the LIBOR-SONIA spread shows that last week's half percentage point cut in the Bank of England's policy rate has been more-or-less totally absorbed: almost none of that interest-rate cut has been passed on in the form of lower interest rates charged by banks when lending to each other.

Which is why only a relatively small number of mortgage rates and business lending rates have been reduced by the full half percentage point.

That's distressing, because it seems to indicate that monetary policy has become toothless, ineffective.

At a time when we're in a recession, it's particularly worrying if cuts in interest rates by the Bank of England aren't leading to reductions in the cost of credit for real people and real businesses.

And don't forget that in the last few weeks, central banks - including the Bank of England - have literally been spewing loans of short-term and medium-term maturity into the banking system. And these central banks have been providing these loans in return for more and more eccentric and eclectic collateral.

Yet although there's a ton of cash or liquidity sloshing through the system, banks want to hoard it rather than lend it.

What's going on?

Well the widening in the interest-rate spread may in part reflect the margin demanded for the new interbank lending guarantees demanded by the Treasury.

But that would seem to me to be a relatively minor factor.

It may simply be the case that banks are so badly shaken by the 14 months of crisis in their industry that they have lost almost any appetite to lend.

They've made a decision to lend less, to deleverage, and no amount of cajoling or even bullying by the authorities is going to persuade them to do otherwise.

Which is highly undesirable, to put it mildly, when the real economy is showing every symptom of having caught a very bad cold from the sickness in the financial economy.

• Permalink
• Comments (0)