Bloomberg News

Dollar Libor-OIS Spread at 2-Year High Amid Europe Bank Concern

October 24, 2011

Oct. 24 (Bloomberg) -- A gauge of banks’ reluctance to lend widened to the most since July 2009, a sign that market tensions are increasing as Europe’s leaders work on a plan to bolster their nations’ banks.

The dollar Libor-OIS spread was 34.13 basis points at 2:10 p.m. London time. The spread widened to 34.53 basis points, according to data from the British Bankers’ Association. That’s the most since July 6, 2009, based on closing-market rates.

“This highlights that there’s still some stress in the funding markets,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “Banks are having problems attracting dollar funding, probably because so much is still unknown about the European bank recapitalization plans.”

Measures of money-market stress have been elevated throughout the regional debt crisis, Wand said.

The rate at which London-based banks say they can borrow for three months in dollars rose to the most in more than a year

The London interbank offered rate, or Libor, for dollar loans climbed to 0.420282 percent from 0.41833 percent yesterday, data from the British Bankers’ Association showed. That’s the highest since August 2010.

Europe’s leaders meeting yesterday in Brussels said a complete blueprint for crisis resolution, including bank recapitalization plans, won’t come together until a summit on Oct. 26. Euro-region banks need an estimated 100 billion euros ($139 billion) in fresh capital, according to a person familiar with the leaders’ deliberations.

Basis Swaps

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 93 basis points below the euro interbank offered rate, according to data compiled by Bloomberg. It reached 112.53 on Sept. 12, the most since December 2008.

The one-year basis swap was little changed at 67.75 basis points under Euribor. A basis point is 0.01 percentage point.

A measure of banks’ reluctance to lend to one another in Europe also increased. The Euribor-OIS spread, the difference between the borrowing benchmark and overnight index swaps, rose to 76.3 basis points from 74.5 basis points. The difference expanded to 89.2 basis points on Sept. 23, the widest since March 2009.

Lenders increased overnight deposits at the European Central Bank to the most since Oct. 10. Banks parked 202 billion euros at the Frankfurt-based ECB. That compares with a year-to- date average of 62.8 billion euros.

--With assistance from Paul Dobson in London. Editors: Nicholas Reynolds, Matthew Brown

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net.

To contact the editors responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net; Daniel Tilles at dtilles@bloomberg.net


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