Stress in the UK banking system has intensified since Britain’s vote to leave the European Union, with the premium banks charge to lend each other short-term sterling funds doubling to its highest level in four years.
The Libor-OIS spread is a gauge of banks’ willingness to lend to each other and is perhaps the most fundamental barometer of the banking system’s health. Its widening comes amid a sudden darkening of the outlook for Britain’s economy. Christopher Vecchio, Currency Strategist at DailyFX, highlights how the widening of spreads could spell warnings of broader financial stress in Reuters.
“We’re not right at the edge yet but recession odds are creeping up and the flattening yield curve speaks to that. It’s still early in the game, but a flattening yield curve for banks is bad as it erodes their net interest margins. An environment of falling long-term yields is going to put a lot of pressure on financials,”
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