Libor Lies & Bank Lending

1 month LIBOR is at .29% down from 2.46% a year ago.
3 month LIBOR is at .49% down from 2.80% a year ago.
6 month LIBOR is at .94% down from 3.12% a year ago.

From the looks of these figures the 1,3, and 6 month rates would be stimulating an orgy, maybe even a Bouillabaisse of lending activity amongst US Banks. Normally it allows US banks to borrow cheaply and lend for several percentage points (FLOAT) more giving them a way to "earn" their way out of their current troubles.

True, in "normal" times this would be the case, but the problem is, the LIBOR rate is low largely because central banks are propping up the entire industry. When these rates eventually rise to the market level that reflects banks true lending state, it will not only halt interbank lending, but all lending all together.

These low rates are great for consumers who have loan rates "floating" on LIBOR. $360 Trillion, yes Trillion! are floating on LIBOR currently. These rates are also beneficial for banks that actually do lend, as they can borrow at effectively zero.

So in actuality, world central banks are subsidizing shaky mortgages by artificially lowering the reference rate used to reset rates every year.

You would think the banks are making out like bandits, But the one major reason for LIBOR's fall, is the Federal Reserve’s many emergency lending facilities, which have reduced the risk that any major bank will suffer serious problems. When the Fed withdraws these initiatives, the cost of funding bank loans will increases, especially while banks are still working through their difficulties. If banks have been too aggressive in pricing the loans they have made, the rising cost of funding them might make the loans uneconomical.

tradersutra.blogspot.com/2009/06/big-libor-failure.html

tradersutra.blogspot.com/2009/04/fatal-flaws-and-credit-cycle.html

Also, going back back to that $360 Trillion figure that floats on LIBOR. There is a grouping gap between the rates that the biggest banks charge each other for credit.
The difference between the highest and lowest interest rates banks say they pay for three month dollar denominated loans is near the widest this year. The spread signals that lenders are still lacking the basic confidence in each other, even with central bank quantitative easing. Counter party risk has eased but banks are predominately lending very tepidly.

Most financial "experts" and economists are fully aware that the only reason that the economy has not gone into the tank is the the trillions in governmental safeguards and industrial subsidies. Its this explicit and implicit government guarantee that has been the glue for the system. The expectations are that these "training wheels" will stay on for some time, the only question is how much more "juice" is left? So just looking at the fall in LIBOR is a fools game. I don't think LIBOR by itself can be a true predictor of the real interbank lending market. The true predictor of the lending market is the US Central Bank. The guys over at LIBOR kinda noticed this, they need to protect their bacon as well, so they have now allowed banks operating outside of London to contribute LIBOR rate quotes. This is in contrast to the 16 institutions they gather from now. But it doesn't change the following:

Is it strange that banks that submitted the lowest rates to BBA are the ones that took TARP like JPM, BOFA, CITI? While the other end of the range is represented by pseudo nationalized banks such as RBS, and UBS, which had all of its bad assets swept by the Swiss National Bank in exchange for loans? Also banks that were neither nationalized (RBC) nor received governmental backstopping (Bank Of Tokyo) are contributing the highest LIBOR rates.

Very perplexing.

Its this perplexing schism that has made market participants lose faith in the impartiality and overall objectivity of BBA LIBOR. The TARP vs. Non Tarp and nationalized vs non-propped bank situation has clearly changed risk perception. This one perception has not changed this year at all.

So what we have at the moment is not only socialization of "bank losses", but also socialization of "bank risk" all together.