Saturday, 1 March 2008

UK credit crunch - it is not over

(Click on the chart for a larger image)

If anyone thinks that the UK credit crunch is over, then the latest data from the Bank of England on interbank lending should dispel that idea.

As of January, interbank loans were down almost 70 percent from their August peak. Despite the Bank of England's frantic year-end attempts to revive the market, lending levels are essentially stagnant. Lower interest rates and more liquidity have done little to encourage the banks to lend to each other.

(Click on the chart for a larger image)

However, more trouble could be on the way. The 3 month interbank spread is also climbing north. This suggests that the some banks are getting a little short of cash again.

While the housing bubble was expanding, many smaller banks increasingly relied upon the interbank market to fund their expanding mortgage business. The crashing interbank market will limit funding for mortgages going forward. That can only mean one thing; lower mortgage issuance and lower housing demand.

Data source

Bank of England, monthly outstanding balances of loans to UK resident banks (RPMTBGZ); 3 month interbank interest rates (IUDAMIJ) minus the official bank rate

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