Credit Crisis Watch: A Look on Crisis Indicators

- by Amar Ranu *

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The third indicator to gauge the credit market stress is the difference between the LIBOR Rate and the Overnight Index Swap (OIS). When the LIBOR-OIS Spread is increasing, it indicates that banks believe the other banks they are lending to have a higher risk of defaulting on the loans, so they are charging a higher interest rate to offset this risk. The opposite applies to a narrowing LIBOR-OIS Spread. The difference between those two rates is the perceived availability of funds available for short-term loans. The higher the LIBOR-OIS Spread, the less money there is for lending.

The movement in the LIBOR-OIS Spread over the past few weeks is similar to the TED Spread and shows that credit markets are still not functioning. However, the LIBOR-OIS Spread is now back to 1.24, which is the lowest (healthiest) reading since September 2008.

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* Amar Ranu has done his B.E. (Electronics) from B. D. College of Engineering, Wardha, followed by MBA (Finance & Marketing) from Indian School of Mines University (ISMU), Dhanbad. Then came brief stints at Indian Institute of Banking & Finance as an Officer and at LIC Mutual Fund Asset Management Co. Ltd. as Relationship Manager (Business Development / Analysis). He is currently a student of Indian Institute of Capital Markets, Navi Mumbai.
Article posted on February 8, 2009.

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