Friday, 1 August 2008

No recovery in sight

The credit crunch continues. Three charts point to the dire state of the UK interbank market.

The first chart shows the spread between 3 month interbank interest rates and the official bank rate. Spreads continue to be elevated.

The second chart again looks at 3 month interbank rates, but this time captures the spread relative to 3 month gilt repo interest rates. The spread has come down a little in recent weeks, but this is due to rising repo rates rather than falling interbank rates. Since the last peak in the spread, which was April, the repo rate is up 33 basis points, while the interbank rate is down only 13 basis points.

What about overall lending. The interbank market collapsed last August and hasn't recovered since. In fact, over the last month or so, interbank lending has actually fallen slightly.

The special liquidity scheme has failed. So, it is little wonder that the Treasury and the BoE are looking for something magical to restart interbank lending. They won't find it easily.


yellerKat said...

Wow that last graph - never seen that before! Someting to ponder about over tonights beers! Thanks Alice.

Anonymous said...

The correlation between the huge reduction in interbank loans and the ~20% loss of value in sterling against the Euro is uncanny.

It's almost as if there was a huge currency shift away from sterling. This could explain a loss of liquidity. I would love to know if any particular country was responsible for this shift. Perhaps even a politically driven attempt to draw the UK into recession.


Alice Cook said...


I've posted it a couple of times before. You must be one of the growing number of new readers.

Thanks for the kind words.


aSteve said...

Mike - fascinating idea.

Alice... do you really think these graphs show an awful situation? To me they suggest a relatively stable new normality.

Anonymous said...

Dear Alice,

More good news:

HBOS predicts a 20% fall in house prices by end of 2009



Anonymous said...

One question, which unfortunately shows my complete ignorance. Is interbank lending based on fractional reserve banking or are they actually lending deposits ? Because if this lent money is created as credit that would mean about 400 billion disappeared from the UK banking system, wouldn't it?
Or I am I just wrong.

Anonymous said...

Alice, thanks for these graphs.

I think the first two show that the lower of the comparators are artificially low, and should be 0.5% closer to the market rate for sterling.

In the last, I see the same "factor of 3" (actually a tad more than that) as I have seen in other of your graphs abut how much credit was around in the system and now is not - a factor one can see elsewhere.

...I am not being mystical here!

I mean, the property market basically went up by a 200% increase - I remember that figure applying for London 1995-2005, and I am sure 200%+ just about sums up the property bubble overall.

In your interbank loans graph, the decline is by the same factor, around the £600 billion to £200. The correspondence seems to me very telling - that without the facility to triple credit by off-balance methods, we are back at the level of credit which supported the sustainably priced property market of say 1993-1998. I would say it defines the sustainable level of property prices.

Would you agree that this decline in interbank tells us where the property market has to go for the UK to get back to 'sensible' or dare I try the word 'normal'?

Would a decline in property prices of about two thirds be in order, maybe less a little for early mover optimism near the bottom of the collapse?

The present interbank loan level seems nice and stable - basically a flat line at £200 billion. Maybe that tells us something too about the amount of credit the economy can sustain without getting into bubble mode.


B. in C.