Bloomberg News

European Banks’ Dollar Funding Costs Decline to One-Week Low

May 22, 2012

The cost for European banks to borrow in dollars fell to the lowest in more than a week, according to a money-market indicator.

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 45 basis points below the euro interbank offered rate, or Euribor, from minus 51 yesterday at 4 p.m. in London. The measure was minus 41.5 basis points on May 4, the cheapest level since July.

“Relative to what we saw over the latter half of 2011 and early this year, there is now very little evidence of strain on the European banking sector’s dollar funding operations,” said Chris Clark, an interest-rate strategist at ICAP Plc in London.

The one-year basis swap was 64.5 basis points below Euribor from minus 69 yesterday. A basis point is 0.01 percentage point.

Prices in the forward market for three-month Euribor relative to overnight indexed swaps -- known as the FRA/OIS spread -- narrowed to 35 basis points from 39, the lowest since May 10. A decrease signals banks are less reluctant to lend.

The Euribor/OIS spread held at 38 basis points for the 13th day, the lowest since Aug. 1.

Lenders cut overnight deposits at the Frankfurt-based European Central Bank yesterday, placing 768 billion euros ($983 billion) with the bank from 790 billion euros on May 18.

Three-month Euribor, the rate banks say they pay for loans over that period in euros, fell to 0.681 percent from 0.682 percent. One-week Euribor was unchanged at 0.317 percent.

The London interbank offered rate, or Libor, for three- month dollar loans was unchanged at 0.467 percent. The three- month dollar FRA/OIS spread was little changed at 45 basis points.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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