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September 4, 2007

Medium-term funding in short supply

by Gill Montia

Story link: Medium-term funding in short supply

UK banks seeking medium-term funding are facing interest rates that are at a ten-year high.

The London interbank offered rate (Libor) for three-month sterling has reached 6.74%, its highest level since December 1998.

The Libor is fixed on a daily basis by the British Bankers’ Association and reflects the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market.

As such, it is also a widely used benchmark for short-term interest rates.

Concerns about losses from US sub-prime mortgage investments have made banks reluctant to lend to each other for lengthy periods and have also increased the cost of borrowing.

Libor for three-month euro borrowing recently increased to 4.74% (the highest level since May 2001), and US dollar Libor has risen to 5.66%, a six-and-a-half year high.

City rumours suggest that sources of medium-term lending are drying up, although shorter-term lending is more widely available.

Barclays is reported to be paying 6.8% for three-month financing, a rate above the Bank of England’s 6.75% penalty rate to borrow sterling.

According to figures from the British Bankers Association, Barclays is also paying the highest rate for dollars and the second-highest rate for euros.

 

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