Is Bank Liquidity Becoming More of a Problem?
In 2008, bank liquidity took center stage. Overnight lending from one bank to another - a cornerstone of the healthy functioning of modern banking and therefore of the world's financial system - almost ceased (or actually may have ceased at one point). The central banks of the world had to "flood" the markets with liquidity (money) in order to keep the banks lending to each other. In fact, that was one of the major reasons given for the gigantic "bailout" packages central banks - most especially US Federal Reserve - insisted their governments authorize.
One measurement of a healthy state of overnight lending between banks is the "TED Spread." The last update I posted about the TED Spread basically said it looked like the spread was now going up in earnest. If you followed the series over the past few months, you witnessed this ratio starting to increase, with starts and stops and reverses. But last time, it looked like it may be pushing up more consistently.
Now it seems that the Federal Reserve - which had committed to helping European banks through the current European sovereign debt crisis - is worried about European bank liquidity. So it looks as though the slow but steady increase in the TED Spread is telling us - as it is designed to - to watch our for a possible looming liquidity crisis.
On the other hand, if you study the TED Spread chart, the spread is not nearly as high as it was, nor is it increasing as quickly as it did, leading up to the 2008 crisis. That may be some comfort right now, but these things can change pretty dramatically, so it bears watching.
And Bloomberg Business Week reports that that's exactly what the Fed is going to do. I don't know if they're checking the TED Spread chart, but they apparently want daily updates on the state of liquidity of European banks.
Could something bad happen with bank liquidity this October, three years after 2008's crisis? Wait and see.
One measurement of a healthy state of overnight lending between banks is the "TED Spread." The last update I posted about the TED Spread basically said it looked like the spread was now going up in earnest. If you followed the series over the past few months, you witnessed this ratio starting to increase, with starts and stops and reverses. But last time, it looked like it may be pushing up more consistently.
Now it seems that the Federal Reserve - which had committed to helping European banks through the current European sovereign debt crisis - is worried about European bank liquidity. So it looks as though the slow but steady increase in the TED Spread is telling us - as it is designed to - to watch our for a possible looming liquidity crisis.
On the other hand, if you study the TED Spread chart, the spread is not nearly as high as it was, nor is it increasing as quickly as it did, leading up to the 2008 crisis. That may be some comfort right now, but these things can change pretty dramatically, so it bears watching.
And Bloomberg Business Week reports that that's exactly what the Fed is going to do. I don't know if they're checking the TED Spread chart, but they apparently want daily updates on the state of liquidity of European banks.
Could something bad happen with bank liquidity this October, three years after 2008's crisis? Wait and see.
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