You can't just look at rates and compare them, you have to examine the differences between LIBOR, PRIME US rates for example and Federal reserve rates.
The LIBOR rate jumped significantly during the Lehmann collapse, so a useful benchmark to compare would be the differential between then (Sep 18, 2008) and now.
Federal Reserve Rate (cost to US banks)
2008 – 1.50% and in 2011 – 0.25%
Libor Rate (cost to lend to other banks)
2008 – 3.12% and in 2011 – 0.390%
Prime rate (cost to you the consumer of loans)
2008 – 5% and in 2011 – 3.25%
Even as I type this data, I can instantly see what the problem was in 2008 and potentially why the Federal Reserve in the US slashed interest rates so dramatically prior to 2008.
Some analysis:
Firstly, let's look at LIBOR margins. In 2008, the gap between Fed funds and the LIBOR rate was 52%. That gap in now in 2011 is now 35%. Essentially the higher the difference, the higher the costs and asssociated risks bank place on lending funds to each other.
Secondly, let’s peer at what the banks sell this credit for. The prime rate for end consumers is 35% lower now in 2011 than in 2008. In 2008, the difference between the cost of the LIBOR rate and the prime rate to you and I was 37.6% (otherwise known as bank margin). In 2011, the difference is 88%.
In short, the banks consider the risk of doing business with each other at almost half of that of the risk in 2008 at the time when Lehmann’s was collapsing. What’s more is that if banks do borrow at LIBOR rates from other banks to lend to you and I, the margin they receive is almost 2.5 times what they were making in 2008. The Greek crisis has had little impact on bank margins and appetite for risk to date, however the LIBOR rate is slowly but surely on the rise.
KZL Price at posting:
42.0¢ Sentiment: Buy Disclosure: Held
