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Barclays and the BoE have probably saved the financial system ... letter from Mr Paul Langtry.
Sir, The drop in the main three month sterling Libor benchmark index fell rapidly from early 2008 from 6 per cent to about 1 per cent and has been around this level for the past four years. Discussions between the Bank of England and Barclays, and presumably the other rate setting banks, were conducted over that period and it would appear that the BoE suggested: do what you have to do.
Over this period, and now, Barclays is setting its Libor rates much lower than where it can raise uncollateralised deposits. I would suggest by between 0.5 per cent and 1.5 per cent. This can be justified. Had this action not been taken, this would probably have created a run not only on Barclays, but all international banks, and guaranteed the collapse of the financial system as the public’s perception of the banks’ creditworthiness imploded.
The wholesale money market in the UK, Europe and the US is completely frozen. The banks are hoarding cash in liquid and perceived quality government bonds, for example gilts, Bunds and treasuries, with an eye on future losses still to materialise from enormous non-performing loans on their balance sheets. The large international banks still have on average $1tn balance sheets of undisclosed and dubious quality loans. Until this can be addressed and deleveraged, they must hoard cash to repay future liabilities otherwise, in the next few years, they will not be able to meet their losses and will fold or be nationalised. Much deleveraging is still taking place.
The low Libor rates can thus be explained. This is the rate at which the bank rate setters were prepared to lend to triple-A and double-A names, confident that they would get the principal back. Unfortunately, but not unsurprisingly, the quality names were already hoarding cash and did not require term funding. Thus they were not bidding for any cash at all. There have been periods of days, even months on end, where no interbank wholesale lending was taking place at all.
Sadly in the 1990s the international banks outsourced credit decisions to rating agencies who, in turn, made a complete hash of assessing risk and became totally reactive to events. Their forward thinking analysis was non-existent and little has changed. Standard & Poor’s, Moody’s, Fitch et al should be out of business with investors and creditors lining up the length and breadth of Wall Street, lawsuits in hand.
The banking sector should return to the sensible days of internally employed analysts determining loan and credit policy, as was the model of the once mighty and successful merchant banks.
So why were Libor rates set so low? The early days of the credit crisis saw the banking system almost collapse completely. The reason rates are still so low, both base rates and Libor, is that all the large international banks are still in grave danger and only ultra low funding at almost zero rates are keeping them alive. This helps fund their leveraged non-performing loan books of which the financial world refuses to disclose specific detail. The crisis must end before rates can be reversed.
Time is a great healer and things may look better in five or 10 years. Thus I would not blame either the BoE, Barclays or the other bank rate setters. In fact they have probably saved the financial system and capitalism for the foreseeable future.
Paul Langtry, London SW6, UK
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