Business | Banking
Interbank loads may decrease considerably
Money markets may remain frozen if financial institutions become reliant on central bank cash, discouraging them from lending to each other, the Bank for International Settlements said.
- Bloomberg
- Published: 23:32 December 8, 2008
London: Money markets may remain frozen if financial institutions become reliant on central bank cash, discouraging them from lending to each other, the Bank for International Settlements said.
"Interbank lending has not resumed, and money markets remain dysfunctional despite increased central bank intermediation and state guarantees," Francois-Louis Michaud and Gert Schnabel, analysts at the Basel, Switzerland-based BIS, wrote in a report published on Monday.
"Increased central bank intermediation may in some cases weaken banks' incentives to resume their intermediation function."
To combat the seizure in credit markets, central banks and governments around the world pumped record amounts of cash into the financial system. The US Treasury is administering a $700 billion (Dh2.2 trillion) financial-rescue program authorised by Congress in October by injecting capital directly into banks.
The difference between the rate banks charge each other for dollar loans and the overnight indexed swap rate, a gauge of expectations of where the Federal Reserve's target rate will be in coming months, was 191 basis points as of yesterday morning in London, indicating financial institutions are still reluctant to lend.
Former Federal Reserve Chairman Alan Greenspan said in June that the spread, known as the Libor-OIS spread, should be used as an indicator of the health of credit markets. The spread averaged 11 basis points in the five years before the credit crisis started in August 2007.
It is 'unclear' how long central banks will have to continue providing cash, according to the BIS, which was formed in 1930 and acts as a central bank for the world's monetary authorities.
While the increased role of the Federal Reserve, European Central Bank and Bank of England are meant to be a 'temporary substitute', they may "discourage banks from lending to other banks," the BIS said.
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