LIBOR is at new lows, signaling faith in banks
Big banks’ cost of borrowing money from one another has fallen to record lows in recent days, another sign that the financial system is inching closer to normalcy.
A key short-term interest rate for banks -- the three-month London interbank offered rate -- slid to 0.79% on Monday from 0.83% on Friday and 1.05% three weeks ago.
LIBOR is what banks pay to borrow from one another. It’s also a benchmark for many floating-rate business and consumer loans (including some mortgages), which means the rate decline should eventually filter through to other borrowers, said John Lonski, economist at Moody’s Investors Service in New York.
At the height of the financial crisis last fall, three-month LIBOR spiked as high as 4.8% even as other short-term rates were crashing. That surge showed that bankers weren’t willing to lend to one another because of fear of a massive wave of bank failures.
LIBOR’s slide “is telling us that people actually believe the banking system will survive,” said Ray Remy, head of fixed income at Daiwa Securities.
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