Interbank lending rates ease further
LONDON -- Lending rates among banks in the U.S. and Europe dropped farther Wednesday as central banks' cash loans to banks appear to be unblocking credit markets.
The rate on three-month loans in dollars -- known as the London Interbank Offered Rate or Libor -- fell sharply, by 0.29 percentage point, to 3.54 percent, the lowest since Sept. 24.
The so-called European Interbank Offered Rate for three-month euro-denominated loans dropped 0.03 percentage point to 4.936 percent, the lowest rate since June 5.
Although the figures remain well above their benchmark rates -- at 1.50 percent in the U.S. and 3.75 percent in the euro zone -- the improvements are significant. The dollar rate has now fallen for eight consecutive days, the euro rate for nine days, leading many analysts to believe a tipping point in credit markets has been reached.
"Decreases in interbank rates can continue," said Peter Chatwell, fixed income analyst at Calyon.
He said the one policy action which is making the real difference in unblocking clogged credit conditions was the coordinated liquidity provision by central banks of unlimited amounts of dollar loans to banks.
"Countries are working together nicely on this. That is restoring confidence," Chatwell said.
Interbank rates are a vital part of a country's economy because they affect the cost of loans to businesses and individuals. They rose in recent months as banks worried that other lenders might collapse, and jumped to historical highs after U.S. investment bank Lehman Brothers filed for bankruptcy in mid-September.
Governments and central banks recognized interbank rates were key to containing the financial crisis and since Lehman's collapse have pulled out all the stops to get banks to lend to one another.
Governments have put up trillions of dollars to guarantee interbank debt and offered to buy stakes in banks. Major central banks have arranged a coordinated rate cut, loosened their requirements on loans and gave the banking sector enormous amounts of short-term loans, both nationally and across national borders.
Most recently, the U.S. Federal Reserve said it would make as much as US$540 billion available to buy assets from mutual funds and encourage banks to lend to each other again.
After this string of massive interventions, banks are finally trusting each other again.
"The first significant activity in money markets came on Friday," Oct. 17, said Chatwell at Calyon.
"Since then, improvements have been getting some momentum. Banks are getting saturated with cash from the liquidity injections," he said.