* Cutting IOER unlikely to lift lending - NY Fed blog * U.S. overnight repo rate unchanged * U.S. sells 3-month bills at same rate as last week * No dollar Libor fixings due to U. K. bank holiday By Richard Leong NEW YORK, Aug 27 The U.S. Federal Reserve will likely refrain from lowering the interest it pays on excess bank reserves as a tool to help the economy, while traders anticipate signs later this week for more monetary stimulus. Traders are focused on whether Fed Chairman Ben Bernanke will signal the central bank will soon buy more bonds to further reduce private borrowing costs in his speech at an event in Jackson Hole, Wyoming on Friday. There has been also chatter about lowering the interest the Fed pays on excess bank reserves (IOER) with the goal of reducing unemployment, which has been stuck above 8 percent. This view of cutting the IOER gained traction this summer after the European Central Bank dropped the rate it pays on excess bank deposits to zero. The Fed currently pays a quarter percentage point on IOER. But most analysts have downplayed the chances the Fed will cut IOER because with short-term U.S. rates already hovering near zero, such a move might cause more harm than good due to possible disruption to money markets. "The argument is not any better, but it's just more common," Alex Roever, short-term interest rate strategist at J. P. Morgan Securities in New York said of the speculation over IOER. On Monday, two Fed staffers weighed in on this issue. They said in a blog on the New York Federal Reserve website that cutting the IOER would do little to change the amount of reserves banks leave with the central bank. "The quantity of balances banks hold on deposit at the Fed would be essentially unaffected by a change in the IOER rate," wrote Gaetano Antinolfi, a Fed senior economist and Todd Keister of the New York Fed's research and statistics group. To be sure, lowering the IOER could exert downward pressure on interest rates in money markets, causing some banks to lend more to consumers and businesses, they said. But if lower IOER causes interest rates on U.S. Treasury bills, repurchase agreements and other money products to fall, investors would feel the squeeze. "It could bring repo rates to zero. I would hate for it to happen," said Jill King, senior portfolio manager at Horizon Cash Management in Chicago. The New York Fed blog provided fodder for traders in quiet trading, due partly to a U. K. bank holiday. Key money market rates on dollars were little changed from Friday's close. The overnight rate on repos, a key source of funding for Wall Street where it uses Treasuries and other investments as collateral in exchange for cash, was last quoted at 0.21 percent, unchanged from late Friday. The U.S. Treasury Department sold $32 billion of new three-month bills at an interest rate of 0.105 percent, matching the level set at last week's auction. Because of the bank holiday in Britain there were no London interbank offered rate fixings on the pound or the dollar.
Reduced bank liquidity in China's onshore loan market is pushing up loan pricing as the country's banks try to curb lending after last week's credit crunch in the interbank market and stock market slump, loan bankers said on Wednesday. Some Chinese state-owned and commercial banks have already asked borrowers to increase the interest margins of existing loans or renegotiate the margins on deals in the pipeline after the People's Bank of China (PBOC) said that the onus was on lenders to better manage their balance sheets."We will temporarily increase pricing of loans that haven't been drawn or fully drawn yet. It applies to all clients," a Beijing-based banker at a Chinese commercial bank said. The policy change could push more Chinese companies into borrowing in the offshore loan market to access cheaper and more readily available funds, bankers said. It could also affect Chinese banks' appetite for and ability to participate in syndicated loans for Asian companies. China's money markets spiked last week after authorities allowed cash market conditions to tighten.
The average overnight Shanghai Interbank Offered Rate (SHIBOR), the average interbank lending rate offered by 18 Chinese commercial banks, rose to 13.4 percent last Thursday, while the one-week repo rate in China's money market climbed to 11.2 percent, the highest in 10 years. One of China's "big four" state-owned banks - Agricultural Bank of China, Bank of China, China Construction Bank and Industrial & Commercial Bank of China - issued an internal note asking for higher margins on loans that had not been drawn yet immediately after last week's cash crunch, a Shanghai-based source at the bank. Another major Chinese commercial bank asked all branches to only allow borrowers that agree to increase loan margins to 130-140 percent of the PBOC rate to draw funds in a video conference late last week, a source at the bank's Beijing branch said, a move which could cut smaller companies out of the market."Bigger companies need more funds and tend to agree with it, but the smaller ones will not draw funds at this time because they can't afford it," the Beijing-based commercial banker said.
Another loan banker at a city commercial bank said that the bank is only able to release funds to borrowers that pay more than 100 percent of the PBOC rate. TEMPORARY DISLOCATION
Bankers said that it is common practise for Chinese banks to prioritise deals with higher returns in times of reduced liquidity and that the increase in pricing is likely to be temporary until market conditions readjust."When liquidity is tight in the market, banks always give priority to those who pay higher margins," the source said. "This is when banks gain more bargaining power."The change in policy means that small and mid-sized banks are likely to restrict lending and banks trying to limit credit will prioritise lending to companies with strong credit profiles over riskier firms, Moody's said in a report on June 24. Money market fluctuations could also temporarily hit some foreign banks' ability to lend as they rely on China's interbank market for renminbi liquidity. Toyota Motor Finance (China) Co Ltd recently postponed the drawdown date on its 1 billion renminbi dual-tranche revolving credit to early July from the end of June, sources said, adding that the delay could have been a result of banks' tightened liquidity."We suspect that some lenders might have problem providing the funds," another source said.