This figure indicates the confidence of the banks. At the height of the credit crunch last year, banks were lending to each other at an eye-watering 6% rate of interest. Today, as you’ll see from the chart below, the interest payable is only 1.35%.
Banking bonus - Three-month LIBOR rates fall to record low
Source: Bloomberg
It’s a great time to be a bank. However, we must remember that the falls have been solely the result of government intervention. Worldwide bailouts, rate cuts and quantitative easing are the catalyst of these record lows.
This is the real reason why so many banks revealed profitable first-quarter results in April. Some analysts saw the sector’s return to profit as a "green shoot", and a reason to be optimistic for a speedy return to economic growth. We heartily disagree. The intervention is the equivalent, as splendidly put by The Absolute Returns Letter "of the US government reducing the cost of goods to zero for its embattled car manufacturers and then going on to buy - courtesy of the tax payer - a couple of million cars that nobody really needs.
"Even Detroit would make money given those conditions!"
This is no recovery. It’s the government spoon-feeding profits to banks and the banks having the wherewithal to keep their mouths open. It can’t last, and neither will these record Libor levels. Continue to play it safe and invest selectively because there is nothing sustainable about this "green shoots" we see before us.
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