The British Bankers Association had voiced concerns in the early part of this week after the previous week’s heavy losses.
The BBA’s overnight LIBOR rate (a measure of the rate at which large banks will lend to each other in the City and set at noon each day) had been at its most volatile since the Enron scandal in 2001.
On Monday the overnight rate went up to 6.
5 above the current base rate.
The BBA said that banks were concerned about the knock-on effects of ‘sub-prime’ mortgage worries in the United States.
Sub-prime mortgages are more expensive than the average because they are offered to people with poor credit histories.
There has been a growing trend for lenders to package such mortgages with less risky products and to sell them on to financial institutions.
It seems that the true identity and value of these packages have not been made clear to investors, and banks are therefore worried about the potential losses and less willing to lend funds, resulting in the ‘credit crunch’.
Martyn Scriven, spokesman for the Jersey Bankers Association, said that there was likely to be a general tightening of the market when institutions were aiming for more liquidity.
‘Every bank strikes a balance.
There is a general shortage of funds and I would expect upward pressure on short-term rates.
Mr Scriven explained that sub-prime mortgage packages had also been ‘sliced’ and that those who had taken on the most risky portion might lose their investment altogether if the value of the underlying properties fell.
But in relation to private equity he said that there had not been much of a tightening.
‘Previously banks were quite happy to lend, with covenant protection.
More recently private equity companies have been able to borrow without so many covenants.
Yes, it is now more difficult, but that is probably not unreasonable at this stage.
Hedge funds ‘What does upset people is the volatility – markets going down by four per cent and then up by three per cent.
That is difficult to manage.
People prefer things to be steady.
But these are testing times,’ he said.
Geoff Cook, CEO of Jersey Finance, said that the industry was ‘not unduly concerned’.
‘All markets do have cycles, and there is not a major concern about market conditions, apart from hedge funds which only make up a single-digit percentage of the total market.
This is very much a credit issue, rather than an investment issue.
We have had some very low interest rates, and it has been cheap to borrow.
People are now facing more expensive money.
Mr Cook said that the drop in the UK inflation rate announced this week, from a 4.
% RPI (June) to 3.
% for July, would put less pressure on the Monetary Policy Committee to raise interest rates.
‘This is one of those cyclical things.
My view is that if the markets were to go on fizzing the way they have been, there could be a more serious correction, rather than the shorter smaller corrections which we have been seeing,’ he said.