Bank funding costs rise, but futures rally

NEW YORK: The cost for banks to borrow short-term dollar funds from other banks continued to grind higher on Thursday, though a rally in futures contracts showed greater optimism that bank funding stresses may not rise as much as some had feared headed into year-end.

London interbank offered rates for three-month dollars increased to 0.31900 percent, the highest rate since last August, and up from 0.31428 percent on Wednesday.

The rate continued to reflect tiering, with many European banks paying slightly above the fixing, while US banks pay less.

A recovery in US bank stocks has, however, improved sentiment around bank funding levels and helped rates futures contracts improve.

"Front-end Eurodollar futures are rallying on the day," said Michael Chang, interest rate strategist at Credit Suisse in New York. "The sentiment is at least not worsening."

The futures rally has reduced expectations of how high Libor may rise by year-end.

Libor futures are now implying that the three-month interbank lending rate for dollar loans will increase to around 52 basis points by December, down from expectations early yesterday that they would increase to 57 basis points.

Bank of America Corp's shares, which were badly beaten down earlier this week on fears the bank would need to raise more capital, soared on Thursday after the bank said that Warren Buffett's conglomerate Berkshire Hathaway would invest $5 billion in the firm.

The stock had also staged a recovery on Wednesday when analysts said that the bank's capital needs were not as dire as some had feared.

European banks continued to have to pay a slightly higher rate as concern over exposures to peripheral European debt remained elevated.

France's Credit Agricole said on Thursday that its access to US money-market funding had been roughly halved as a result of market jitters, to around 25 billion euros. Presenting its second quarter results, the bank said it was however "well-positioned" in terms of liquidity and had alternative sources of dollar funding available.

Barclays, Credit Agricole, Credit Suisse, Royal Bank of Scotland , Societe Generale and UBS all reported having to pay slightly above the daily Libor fixing on Thursday.

Copyright Reuters, 2011