AWvsCBsteeeerike3 wrote:Hungary Jack wrote:BTW, the Times reports today that Central Banks continue to lend vast amounts to banks that cannot find other sources of short-term lending to meet end of day capital requirements. The interest rate on these loans is in double-digits.
The European Central Bank lent banks 190 billion euros, or $273 billion, for a weeklong period after initially estimating that it needed to drain 40 billion euros from the system. It also lent banks $30 billion for one day at a marginal rate of 11 percent, almost six times the Fed’s 2 percent benchmark interest rate. The Bank of Japan pumped another $29 billion into credit markets, its third intervention of this scale since the collapse of Lehman Brothers earlier this month.
Meanwhile, investors are so scared to lend money that they are investing in federal t-bills at negative yields (the interest rate is less than the rate of inflation).
If this continues, we will arrive soon enough at a de facto nationalization of the US banking system.
So, that $300 billion didn't help, but the $700 billion that the gov. is providing will. Granted, you have to establish value for your [expletive] securities/what not, but I thought most of the problem is/was capital.....
If a commercial banker is present, he/she please chime in. I'm not an expert on this.
But my understanding is that commercial banks lend to eachother based on the value of the available collateral (mostly securities) in their portfolio. There is a pecking order to the claims on this collateral if the borrower has problems repaying. The riskiness and pecking order of the collateral offered for the loan determines the interest rate on the loan. So even a small portion of uncertainty of the value of the collateral can upset the whole picture.
If there is anything that investors hate, it is uncertainty. It can be uncertainty about the value of assets on the Balance Sheet . Remember when Enron "casually" restated the value of its special investments? IIRC, it wrote down only $1B of assets, but investors punished the stock so that the company value declined $13 B over the ensuring week). It can also be the uncertainty of high inflation, political upheaval, etc.
So investors are punishing financial stocks because of this uncertainty. And banks are afraid to lend to each other because of uncertainty of the value of collateral. This puts a double-whammy on capital: illiquid securities limit the value of available reserves to loan/borrow against; and banks cannot raise more capital through stock sales because stock prices are so low.
Wikipedia discusses
the nature of the subprime mess. It notes that $1 Trillion of mortgage bonds were issued in 2006 alone. The subprime boom ran from 2003 through early 2007, so there are likely several trillion dollars of these securities out there (face value). Not all are at risk, but any uncertainty over the value of any of them is enough to choke off short-term commercial lending, which is what appears to be happening.
