Armando, Arseny, Cory, Joe, Neekunj SPREAD
Question Source: Historical data
BACKGROUND <ul><li>Libor </li></ul><ul><li>FED </li></ul><ul><li>History </li></ul><ul><li>Why Libor Matters </li></ul>
London Interbank Offered Rate <ul><ul><li>Average rate at which banks loan to one another </li></ul></ul>Libor FED History...
Libor Calculation 16 Banks 10 Currencies Libor FED History Why Libor Matters
Federal Funds Rate The interest rate at which a member institution lends immediately available funds to another depository...
FED & Central Banks <ul><li>Control Inflation </li></ul><ul><li>Control Inflation </li></ul><ul><li>Promote economic growt...
Commercial Banks Federal Reserve (Central Banks) Market Conditions PREMIUM Libor FED History Why Libor Matters
The Credit Crunch Market Conditions Libor FED History Why Libor Matters Washington Mutual Barclays Capital Citigroup Lehma...
Crisis Cycle ? Libor FED History Why Libor Matters
Not US - Exclusive Libor FED History Why Libor Matters LEGEND: CURRENT  Sept 2007 Dec 2007
Why the Libor Matters <ul><li>Borrowing </li></ul><ul><ul><li>Short-term interest rates </li></ul></ul><ul><ul><li>Forward...
IMPACT OF SPREAD <ul><li>Borrowing Costs </li></ul><ul><li>Mortgage Rates </li></ul><ul><li>Bank Profits </li></ul><ul><li...
Borrowing Costs <ul><li>Borrowers v. Lenders </li></ul><ul><li>Businesses v. Consumers </li></ul>Borrowing Costs Mortgage ...
Mortgage Rates FED: 47 % Decrease Mortgage Rates: 10% Increase Borrowing Costs Mortgage Rates Bank Profits Counter Fed
Bank Profits % banks keep Borrowing Costs Mortgage Rates Bank Profits Counter Fed
Countering Fed <ul><li>FED was designed to protect / stabilize the economy </li></ul><ul><ul><li>Government is not affecti...
REASONS FOR SPREAD <ul><li>Seven Reasons </li></ul>
1. Banks Hoarding Cash <ul><li>Banks holding onto cash/cash equivalents </li></ul><ul><ul><li>Massive de-leveraging  </li>...
2. Fear of Counterparty Risks <ul><li>Ability of other banks to pay back loans has been called into question </li></ul><ul...
3. Role of Bank Write Downs <ul><li>Many banks/I-banks highly leveraged and have risky positions </li></ul><ul><ul><li>Ins...
4. Symptomatic of Financial Crisis <ul><li>Where there is fear of uncertainty, premiums must be paid. </li></ul><ul><ul><l...
5. Liquidity Issue <ul><li>Trillions of US dollar positions tied to LIBOR, not enough $ to go around </li></ul><ul><li>Fed...
6. Predatory Lending <ul><li>Banks are interested in limiting exposure to a concentrated amount of banks </li></ul><ul><ul...
7. Clean balance sheets <ul><li>Banks are interested in keeping strong cash positions on balance sheets </li></ul><ul><ul>...
SOLUTIONS <ul><li>Inject Liquidity </li></ul><ul><li>Creation of NYBor </li></ul><ul><li>Expand US Libor </li></ul><ul><li...
1. Inject Liquidity <ul><li>Who would really be paying the price? </li></ul>Inject Liquidity Creation of NYBor Expand US L...
To the Rescue! Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
Moral Hazard Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
2. Creation of a NYBOR <ul><li>Would only track borrowing costs of US banks only. </li></ul>Inject Liquidity Creation of N...
3. Expand US LIBOR Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
Expand the LIBOR <ul><li>Expand the panels of banks which report their borrowing costs to LIBOR </li></ul><ul><ul><li>More...
4. Tighter Scrutiny on Banks “… tighter governance of the rate-setting process. This means broadening the Foreign Exchange...
5. Time? <ul><li>We can use the history to examine the present and predict the future. </li></ul><ul><li>Easy and comforti...
<ul><li>What happens when the present has never been seen before? </li></ul><ul><li>We are in unknown territory, and no on...
This could be you. Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
Thank you
Upcoming SlideShare
Loading in …5
×

The Spread: Libor and Fed Funds Rate

8,909 views
8,796 views

Published on

A presentation from early fall about changes in the Libor and the Fed Funds Rate. We discuss the relationship between the two rates. * Leave a comment if you download, please! *

Published in: Business, Economy & Finance
1 Comment
2 Likes
Statistics
Notes
No Downloads
Views
Total views
8,909
On SlideShare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
140
Comments
1
Likes
2
Embeds 0
No embeds

No notes for slide
  • The Spread: Libor and Fed Funds Rate

    1. 1. Armando, Arseny, Cory, Joe, Neekunj SPREAD
    2. 2. Question Source: Historical data
    3. 3. BACKGROUND <ul><li>Libor </li></ul><ul><li>FED </li></ul><ul><li>History </li></ul><ul><li>Why Libor Matters </li></ul>
    4. 4. London Interbank Offered Rate <ul><ul><li>Average rate at which banks loan to one another </li></ul></ul>Libor FED History Why Libor Matters
    5. 5. Libor Calculation 16 Banks 10 Currencies Libor FED History Why Libor Matters
    6. 6. Federal Funds Rate The interest rate at which a member institution lends immediately available funds to another depository institution overnight. “ 2%” FED (FOMC) Target Rate Open Market Operations Funds Rate Libor FED History Why Libor Matters
    7. 7. FED & Central Banks <ul><li>Control Inflation </li></ul><ul><li>Control Inflation </li></ul><ul><li>Promote economic growth </li></ul>Federal Reserve Other Central Banks Libor FED History Why Libor Matters
    8. 8. Commercial Banks Federal Reserve (Central Banks) Market Conditions PREMIUM Libor FED History Why Libor Matters
    9. 9. The Credit Crunch Market Conditions Libor FED History Why Libor Matters Washington Mutual Barclays Capital Citigroup Lehman Brothers Merrill Lynch UBS
    10. 10. Crisis Cycle ? Libor FED History Why Libor Matters
    11. 11. Not US - Exclusive Libor FED History Why Libor Matters LEGEND: CURRENT Sept 2007 Dec 2007
    12. 12. Why the Libor Matters <ul><li>Borrowing </li></ul><ul><ul><li>Short-term interest rates </li></ul></ul><ul><ul><li>Forward rate agreements </li></ul></ul><ul><ul><li>Syndicated loans </li></ul></ul><ul><ul><li>Variable rate mortgages </li></ul></ul><ul><li>Financial Instruments </li></ul><ul><ul><li>Derivatives - futures, forwards, options, and swaps. </li></ul></ul><ul><ul><li>Floating rate notes </li></ul></ul><ul><li>Currencies </li></ul>Source: WSJ, Apr 2008 Libor FED History Why Libor Matters
    13. 13. IMPACT OF SPREAD <ul><li>Borrowing Costs </li></ul><ul><li>Mortgage Rates </li></ul><ul><li>Bank Profits </li></ul><ul><li>Counter Fed </li></ul>
    14. 14. Borrowing Costs <ul><li>Borrowers v. Lenders </li></ul><ul><li>Businesses v. Consumers </li></ul>Borrowing Costs Mortgage Rates Bank Profits Counter Fed
    15. 15. Mortgage Rates FED: 47 % Decrease Mortgage Rates: 10% Increase Borrowing Costs Mortgage Rates Bank Profits Counter Fed
    16. 16. Bank Profits % banks keep Borrowing Costs Mortgage Rates Bank Profits Counter Fed
    17. 17. Countering Fed <ul><li>FED was designed to protect / stabilize the economy </li></ul><ul><ul><li>Government is not affective at setting lending rates </li></ul></ul>Borrowing Costs Mortgage Rates Bank Profits Counter Fed
    18. 18. REASONS FOR SPREAD <ul><li>Seven Reasons </li></ul>
    19. 19. 1. Banks Hoarding Cash <ul><li>Banks holding onto cash/cash equivalents </li></ul><ul><ul><li>Massive de-leveraging </li></ul></ul><ul><ul><li>Flight to quality assets like Treasuries as opposed to inter-bank loans </li></ul></ul>
    20. 20. 2. Fear of Counterparty Risks <ul><li>Ability of other banks to pay back loans has been called into question </li></ul><ul><ul><li>Sub prime/credit crunch, capital structure unknown </li></ul></ul><ul><ul><li>Lehman affirmed balance sheet $27/share </li></ul></ul><ul><ul><li>Bear affirmed balance sheet $60-80/share </li></ul></ul>
    21. 21. 3. Role of Bank Write Downs <ul><li>Many banks/I-banks highly leveraged and have risky positions </li></ul><ul><ul><li>Insufficient capital / collateral to finance loans </li></ul></ul>
    22. 22. 4. Symptomatic of Financial Crisis <ul><li>Where there is fear of uncertainty, premiums must be paid. </li></ul><ul><ul><li>Risk premium rising, credit crunch still continues </li></ul></ul>“ Worst of the Credit Crisis may be over.” - Henry Paulson, May 7, 2008
    23. 23. 5. Liquidity Issue <ul><li>Trillions of US dollar positions tied to LIBOR, not enough $ to go around </li></ul><ul><li>Fed as of Sunday expanded credit facilities to allow use of risky collateral </li></ul><ul><li>Banks less likely to borrow from Fed, Fed is lender of last resort </li></ul><ul><li>Banks don’t want perception that they are in trouble </li></ul>
    24. 24. 6. Predatory Lending <ul><li>Banks are interested in limiting exposure to a concentrated amount of banks </li></ul><ul><ul><li>Bear’s trades not cleared by Goldman then other trading partners </li></ul></ul><ul><ul><li>Survival of the Fittest (biggest) </li></ul></ul>Goldman Bear Stearns
    25. 25. 7. Clean balance sheets <ul><li>Banks are interested in keeping strong cash positions on balance sheets </li></ul><ul><ul><li>Banks want to show the market they have adequate cash and liquidity in case of a market fall out </li></ul></ul><ul><ul><li>Bear Stearns Liquidity issue not a capital issue </li></ul></ul>
    26. 26. SOLUTIONS <ul><li>Inject Liquidity </li></ul><ul><li>Creation of NYBor </li></ul><ul><li>Expand US Libor </li></ul><ul><li>Tighter Scrutiny of Banks </li></ul><ul><li>Time? </li></ul>
    27. 27. 1. Inject Liquidity <ul><li>Who would really be paying the price? </li></ul>Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
    28. 28. To the Rescue! Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
    29. 29. Moral Hazard Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
    30. 30. 2. Creation of a NYBOR <ul><li>Would only track borrowing costs of US banks only. </li></ul>Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
    31. 31. 3. Expand US LIBOR Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
    32. 32. Expand the LIBOR <ul><li>Expand the panels of banks which report their borrowing costs to LIBOR </li></ul><ul><ul><li>More complete, reflective average </li></ul></ul><ul><li>Increase the accuracy of the benchmark by better capturing the US market. </li></ul>Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
    33. 33. 4. Tighter Scrutiny on Banks “… tighter governance of the rate-setting process. This means broadening the Foreign Exchange and Money Markets committee that oversees Libor and creating a new group that would scrutinize the data submitted by banks.” Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
    34. 34. 5. Time? <ul><li>We can use the history to examine the present and predict the future. </li></ul><ul><li>Easy and comforting to call it “cyclical” and say we’re between crests. </li></ul>Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
    35. 35. <ul><li>What happens when the present has never been seen before? </li></ul><ul><li>We are in unknown territory, and no one knows how deep this will go… </li></ul>Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
    36. 36. This could be you. Inject Liquidity Creation of NYBor Expand US Libor Tighter Scrutiny of Banks Time?
    37. 37. Thank you

    ×