This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Banks Curb Lending: Analyst's Toolkit

Stocks in this article: C BAC CS

BOSTON ( TheStreet) -- Much of the money pumped into the economy over the past two years was aimed at getting the likes of Citigroup (C), Bank of America (BAC) and Credit Suisse (CS) to start lending again.

Lending is crucial for the economy to function properly because companies depend on short-term loans to meet obligations while cash is tied up in the business. Recently, however, the flow of money seems to be slowing, indicating trouble ahead.

The TED spread is a measure of liquidity in the banking system. As the chart shows, it's been rising in the second quarter. Calculating the spread is easy: It's the difference between the 3-month London Interbank Offered Rate (LIBOR) and the 3-month Treasury bill yield. Currently, LIBOR stands at about 54 basis points (bps) while the 3 month T-bill is trading at 13 bps, resulting in a TED spread of about 41 bps. (TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract.)

In isolation, the number means little, but when tracking its movement, it can tell us plenty.

Banks effectively set the LIBOR rate by deciding how much to charge one another in interest on loans. So it's essentially a gauge of risk aversion. The higher LIBOR climbs, the more compensation banks demand to lend to one another.

As an extension, the TED spread adjusts the level of LIBOR for the rate at which the U.S. government lends, the latter of which is closest thing to a sure bet as there is in investing. That way, if short-term government rates are high, the LIBOR will be high. When the TED spread widens, however, it signals a disconnect between government rates and the rates banks charge one another, indicating risk aversion at banks and fewer funds available for lending. That shrinks liquidity in the credit markets and erodes growth potential.

At the height of the credit crisis, the TED spread jumped to a previously unfathomable 425 bps, 10 times today's level. That indicated a near-grinding halt to the economy, so the current spread isn't even in the same league. Still, the increase is a concern.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs