In the spring, the Wall Street Journal reported that some banks were reporting lower rates to avoid looking desperate for cash. After the British Bankers Association found that some banks were being conservative (that is, underestimating) the rate of Libor, the London-based firm ICAP decided to introduce its own version, the New York Funding Rate, which tracks estimates of short-term funding costs from the New York offices of global financial institutions.
What they’ve found Thursday morning is an even greater reluctance to lend to each other than is expressed in Libor rates. Lou Crandall, chief economist at Wrightson ICAP, a subsidiary of ICAP, says the Thursday New York three-month rate was 3.71%, or 0.51 percentage point above Libor.
That’s an incredible difference. Mr. Crandall notes that since the introduction of the New York rate in June, the difference between this rate and Libor has tended to be no more than one to two-hundredths of a percentage point. Monday, it rose to 0.04 percentage point, and then jumped to 0.09 on Tuesday and 0.30 on Wednesday. (ICAP’s daily survey includes at least 16 global banking institutions, but can include more.)
“It’s not so much a question of lending, it’s a question of letting money go,” he says. “Banks that have liquidity have to stand ready to meet their customers’ needs, but can’t know until late in the day what those customers’ needs are — so they are reluctant to let any money out the door.”
The BBA’s Libor rate has some advantages over this newer rate. For one, it is more transparent, whereas the the New York rate is anonymous. Mr. Crandall says his daily survey currently finds that most banks are looking to borrow, and they’re basing their estimation of the short-term funding rate on their needs and what they’re hearing in the market, because many are not lending.