Tension rises in bank-to-bank lending but far off crisis peaks
By Marius Zaharia and Jamie McGeever
LONDON (Reuters) - Signs of strain in bank-to-bank lending, the epicentre of the 2007-08 banking crash, hit some of their highest levels in more than a year on Tuesday, though tensions were far from financial crisis peaks.
The spike in interbank stress this week, coinciding with sharp falls in many lenders' share prices, underlined worries that European Central Bank steps to revive and reflate the economy are choking the life out of euro zone lenders.
Banks have been hit by lower long-term interest rates, which have fallen as the growth outlook deteriorates, and by negative short-term rates, which make bank deposits unattractive.
Key measures of interbank stress, derived from the difference between overnight bank-to-bank lending rates on a forward curve and longer-term Euribor or Libor rates, hit their highest since June 2014 in the euro zone and since mid-2012 in the United States on Tuesday.
The euro forward BOR/OIS contract starting in March and ending in June hit its highest since June 2014 at around 18 basis points (bps) on Tuesday before falling just below 16 bps.
It had traded in the 10-12 bps area for the past eight months before rising on Monday by its most since March 2013, when the Cypriot crisis led to a radical restructuring of its banking sector and clients taking losses on their bank deposits.
Coming after years of relative calm in a market that helps determine borrowing costs for consumers and companies' across the currency bloc, it prompted some analysts to draw parallels with the build-up to the global financial crisis.
"It's similar," said Andrew Lapthorne, global head of quantitative strategy at Societe Generale. "We're going into the slowdown with record levels of net debt and ... that's a concern."
However, at the height of the euro zone sovereign debt crisis in 2011-2012, the same spread was almost 150 bps and in the aftermath of the Lehman Brothers collapse in 2008 the spread traded at just below 230 bps.
Its U.S. equivalent briefly rose above 30 bps and on Monday also posted its biggest daily rise since 2012.
"There is risk aversion towards the banking sector, not like we've seen at the beginning of the financial crisis but one of the most significant since the ECB intervened," Commerzbank rate strategist Rainer Guntermann said, referring to ECB President Mario Draghi's 2012 promise to do "whatever it takes" to preserve the euro.
Since then, the ECB has offered banks hundreds of billions in long-term loans and launched a bond-buying stimulus programme meant to print about 1.5 trillion euro. Excess liquidity in the banking sector , which measures the funds banks have beyond what they need for their day-to-day operations, is now 650 billion euros, around the highest levels since 2012.
"Libor-OIS spreads used to be indicative of banking crises, but we're not seeing a banking crisis right now in the sense that there's not a lot of worry about counterparty risk like there was in 2008 or 2011," said Nikolaos Panigirtzoglou, managing director of global asset allocation at JP Morgan.
"The recent fall in bank shares has more to do with some of these banks having asset quality problems and profitability problems ... There's ample liquidity in interbank markets, and the probability of credit events in the banking system is low."
Dollar funding markets also show some tension but no panic. Three-month cross currency basis swaps, which measure the cost of swapping euros into dollars without the exchange rate risk, show the highest premium for dollars since the end of last year.
They fell as low as minus 32 bps early on Tuesday , from minus 28.75 bps on Monday and 26.25 bps last week. They were minus 150 bps in 2011 and 185 bps in 2008. When the spreads are negative dollar funding comes at a premium to euro funding and the reverse is true when they are positive.
(Graphic by Nigel Stephenson; Editing by Dominic Evans)
