LIBOR disparity hurting lenders

According to Mark Sismey-Durrant, chief executive of Heritable Bank, the market had never experienced such a large, sustained disparity between the two rates before and for lenders who price off Base Rate but get funding off LIBOR, the difference was painful.

He said: “There are serious problems with the money markets at the moment but there are also serious problems for people who price off Base Rate but fund off LIBOR. There is a full 1 per cent difference and LIBOR has been out of sync for so long. People are lending off such low margins too so I can see some serious problems up ahead for some lenders.”

Sismey-Durrant believed this pressure on lenders would continue well into 2008 as LIBOR was set to remain high as a result of market nervousness.

“Everyone is dressing their balance sheets at the moment. Even when the year ends, we’ll still be in unknown territory. LIBOR might come down by 0.25 per cent but there will still be a massive difference, especially after the rate cut.”

The initiative from the world’s major central banks last week to pump liquidity into the market helped LIBOR ease slightly but Iain Smith, sales director at Accord, said: “The question is will lenders have to pass the costs onto consumers?”

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