hr: Money

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Banks nowadays are facing hard times, as they find it more and more difficult to raise cash to use on their investments. This situation has already been foreseen by interest-rate derivatives traders. However, the worse is yet to come and these same traders are increasing their bets that cash will become increasingly difficult to come by.

Let’s take a look at the spread (or difference) between the three-month dollar London interbank offered rate (Libor) and the three-month forward-traded overnight index swap rate. What we see here is a higher than similar spreads that are to expire this month, as revealed by Credit Suisse Holdings Inc.

What the forward movement of Libor tells you is the market is apprehensive about the current conditions, and that things might first get increasingly worse before things can start to get better. There will always be funding pressure that sticks out like a sore thumb, unless and until banks begin to clean up their balance sheets and obtained additional financing, which is about the hardest dilemma banks are facing today.

Derivatives trades reveal that amid the seemingly easing global markets condition, the worst is yet to come as far as banks are concerned after incurring severe losses and writedowns reaching up to $387 billion from mortgage-related securities counting from the beginning of 2007.

Lehman Brothers Holdings Inc. has, during the past couple of days, incurred losses by as much as 8 percent on concern that it will take outside financing to shore up the company’s balance sheet.