Interbank loans fall on tough leverage rules

Tim Wallace
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A CRACKDOWN on banks’ leverage positions has pushed the institutions to cut lending to each other, Bank of England data revealed yesterday, reversing some of the recovery made since the financial crisis struck.

Secured transactions, making up most of the market, dipped 15 per cent in the second half of 2013, the sterling money market survey showed. Volumes fell from an average of £104bn per day to £88bn, a level last seen in 2011.

“Contacts suggested that a contributory factor could have been increased focus on leverage and other metrics of balance sheet usage in anticipation of regulatory requirements,” the report said.

Regulators have been checking up on banks’ leverage, as the rules tighten up on how much each bank can lend out at any given capital level.

Interbank lending is a crucial source of liquidity and short-term funding in the sector, and its collapse was a key problem in the crisis.

The market has gradually recovered over the last five years as banks begin to trust each other once more – secured lending in particular has picked up, though unsecured lending at maturities of longer than three months is still rare.