By Keith Jenkins May 21 (Bloomberg) -- The rate banks say they pay for three-month loans in dollars rose to a ten-month high as concern over counterparty risk and new regulation in the wake of the Greek fiscal crisis increased institutions’ reluctance to lend. The London interbank offered rate, or Libor, for such loans rose for a ninth straight day to 0.497 percent today from 0.484 percent yesterday, the British Bankers’ Association said. That’s the highest since July 24. The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, widened to the most since Aug. 7. Libor has been climbing amid deepening concern about the quality of banks’ collateral amid the euro-region’s financial crisis. The rate may rise as high as 1.5 percent by September, exacerbated by regulatory uncertainty, said Neela Gollapudi, a strategist at Citigroup Global Markets Inc. in New York. “We’re seeing risk aversion intensifying, as well as a widening of risk aversion across asset classes,” said Peter Chatwell, an interest-rate strategist at Credit Agricole Corporate and Investment Bank in London. “That raises concern over counterparty risk and is pushing rates higher in the interbank market.” Three-month Libor is a benchmark for about $360 trillion of financial products worldwide, ranging from mortgages to student loans. Dollar Libor is set by 16 banks in a daily survey by the BBA before 11 a.m. in London. Contributing banks provide estimates on how much it would cost to borrow in 10 currencies for periods ranging from a day to a year. More Gains Seen The U.S. Senate yesterday approved a financial-regulation overhaul, potentially increasing banks’ uncertainty about how they will be able to fund themselves and driving Libor even higher, Citigroup’s Gollapudi wrote in an e-mailed report today. The Financial Regulatory reform bill “is likely worth about 25 basis points of widening in Libor versus Fed Funds,” Gollapudi wrote, referring to the U.S. overnight inter-bank lending rate. The European credit crisis, meanwhile, accounts for a separate 40 to 100 basis points of credit-risk premium in Libor, he said. “Taken together, three-month dollar Libor could reach 100 or 150 basis points over the next several months,” Gollapudi said. A basis point is one-hundredth of a percentage point. “The September Eurodollar contract is trading at 92 basis points today, so September is not a bad time-frame” for the expected increase in Libor, Gollapudi said in a subsequent telephone interview today. “The part about regulation will creep into the market gradually, and the part about Europe is more of an open question.” Libor-OIS Spread The dollar Libor-OIS spread increased to 26.7 basis points from 25.3 basis points. The spread, which compares three-month dollar Libor and the overnight indexed swap rate, surged to 364 basis points, or 3.64 percentage points, after the 2008 collapse of Lehman Brothers Holdings Inc. The three-month rate headed for the 12th straight week of increases even after the European Union announced an almost $1 trillion backstop to assist its most indebted members. Among the measures announced, the U.S. Federal Reserve reopened dollar currency swaps with major central banks to ease funding pressures facing the euro-region lenders. WestLB contributed the highest dollar Libor rate today, at 0.555 percent. The German state-owned lender, which was bailed out during the financial crisis, said yesterday its first- quarter profit slumped 82 percent after a decline in the value of European government bonds hurt trading results. HSBC Holdings Plc gave the lowest dollar Libor rate, at 0.42 percent. The BBA strips out the four highest and lowest rates received, calculating the average of the middle eight. The three-month rate for euros, or euro Libor, was unchanged at 0.636 percent today, the highest level since Jan. 11. The three-month euro interbank offered rate, or Euribor, advanced to 0.695 percent, from 0.692 percent, according to the European Banking Federation. That’s the highest since Jan. 5. To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net

Source